Trading and Investment Strategies: An Introduction to ...

Trading and Investment Strategies

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Trading and Investment Strategies: An Introduction to Analyzing and Developing Efficient Portfolio Management and Currency Trading Strategies

By: Abrin Berkemeyer Jacob Billington Kieran Cochrane Matthew Puksta

Advisors: Professor Hossein Hakim and Professor Michael J. Radzicki

This report is submitted to the faculty of Worcester Polytechnic Institute as fulfillment of the Interactive Qualifying Project; a partial fulfillment of the Bachelor of Science Degree.

This report represents work of WPI undergraduate students submitted to the faculty as evidence of a degree requirement. WPI routinely publishes these reports on its web site without editorial or peer

review. For more information about the projects program at WPI, see .

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1 ABSTRACT

The purpose of this report is to provide an introduction to investing through the analysis of our Interactive Qualifying Project. The report spans the concepts of basic economics, investable markets, creating a methodology for investing, and a breakdown of individual strategies. These concepts, all taken into consideration, culminate in the presentation of our four individual strategies in this report; all of which were implemented over the course of the project. Our individual strategies demonstrate the steps of trading strategy development, implementation, and results analysis. Three of the four strategies present different currency trading techniques: a trend following strategy, a stochastic, average directional index, and relative strength index strategy, and a strategy based off of major economic news. The fourth strategy is an equity based strategy focused primarily on trading stocks that are affected by election years.

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2 ACKNOWLEDGEMENTS

We would like to thank Professor Radzicki and Professor Hakim for being our project advisors. Without their help, guidance, and overall knowledge of the investing world, our IQP experience would have been undoubtedly limited. Professor Radzicki's guidance with coding automated trading served great functionality in the project. Professor Hakim's availability to answer questions and to discuss his personal trades gave substantial insight into trading currencies in this project and the real world.

Furthermore, we would like to thank the WPI Investment Association for allowing us to share what we learned during this IQP with our peers and WPI for this opportunity.

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3 CONTENTS

1 Abstract .......................................................................................................................................................2 2 Acknowledgements ...................................................................................................................................3 4 Introduction ...............................................................................................................................................6 5 Background.................................................................................................................................................7

5.1 Financial Terminology......................................................................................................................7 5.2 Basic Economics ...............................................................................................................................7

5.2.1 Supply and Demand .................................................................................................................7 5.2.2 Business Cycles..........................................................................................................................8 5.3 Investable Markets ............................................................................................................................9 5.3.1 Equity Market............................................................................................................................9 5.3.2 Currency Market .....................................................................................................................15 5.3.3 Options Market .......................................................................................................................18 5.3.4 Futures Market ........................................................................................................................21 5.4 Entering and Exiting a Market ......................................................................................................23 5.4.1 Long Positions.........................................................................................................................23 5.4.2 Short Positions ........................................................................................................................23 5.4.3 Relationship between Long and Short Positions ...............................................................24 5.4.4 Positions in the Options Market...........................................................................................25 5.4.5 Positions in the Futures Market............................................................................................25 5.4.6 Entry Order Types..................................................................................................................25 5.4.7 Exit Order Types ....................................................................................................................26 5.5 Market Movement...........................................................................................................................26 6 Methodology ............................................................................................................................................28 6.1 Strategy Development ....................................................................................................................28 6.2 Analyzing a Trade............................................................................................................................30 6.3 Indicators and Strategies ................................................................................................................31 6.3.1 Moving Averages ....................................................................................................................31 6.3.2 Stochastic Oscillator ...............................................................................................................33 6.3.3 Relative Strength Index..........................................................................................................34 6.3.4 Average Directional Index.....................................................................................................35 6.3.5 Long Term Equity Trading ...................................................................................................35 7 Abrin Berkemeyer's Strategy..................................................................................................................36 7.1 Personal History and Background Information .........................................................................36 7.2 Strategy Development ....................................................................................................................36 7.3 Final Strategy....................................................................................................................................40 7.4 Implementation, Results, and Analysis ........................................................................................41 8 Jacob Billington's Strategy......................................................................................................................44 8.1 Foreign Exchange Strategies..........................................................................................................44 8.2 Equity Market Trading ...................................................................................................................47 8.3 Results...............................................................................................................................................48 9 Kieran Cochrane's Strategy ....................................................................................................................52

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9.1 Strategy development......................................................................................................................52 9.2 Results...............................................................................................................................................58 10 Matthew Puksta's Strategy......................................................................................................................62 10.1 Equity Trading and Portfolio management.................................................................................62 10.2 Results...............................................................................................................................................68 11 Conclusions ..............................................................................................................................................69 12 Citations ....................................................................................................................................................70 13 Appendix A: Trade History and Strategy Code ..................................................................................72 13.1 Abrin Berkemeyer's Trades And Code ........................................................................................72 13.2 Jacob Billington's Strategy Code...................................................................................................74 13.3 Kieran Cochrane's Trades And Code ..........................................................................................76 13.4 Matthew Puksta's Trades ............................................................................................................ 103 14 Appendix B: Journals ........................................................................................................................... 104 14.1 Abrin Berkemeyer's Journal Entries.......................................................................................... 104 14.2 Jacob Billington's Journal Entries.............................................................................................. 116 14.3 Kieran Cochrane's Journal Entries ............................................................................................ 117 14.4 Matthew Puksta's Journal Entries.............................................................................................. 122 15 Terminology Glossary.......................................................................................................................... 125

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