COMP2022 Programming for FinTech Applications
Spring 2020
Professor: Dr. Grace Wang April 03 2020 Friday
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Agenda
qR homework review
qR: Learn by Example (cont.) qThink about trading strategy
Acknowledgement: Thank Dr. Phil Davies for proving the example.
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Trading: TA or FA?
qTA: price (and volume) pattern
qhttps://school.stockcharts.com/doku.php a very good resource
qTo trade:
¡ì Entry and Exit ¡ì Trading signal? ¡ìTarget
¡ì Stop loss
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Trading: TA or FA?
qFA: fundamentals
qTrading on anomalies
¡ì Many of the anomalies are based on accounting variables or ratios.
¡ì Explanations as to why an anomaly exists often relate to investors not fully
understanding a particular accounting item, or not paying sufficient attention
to a key number or ratio.
¡ì Any accounting items and ratios that might be associated with a stock market anomaly?
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Detecting anomalies
qWhat variable or ratio would you recommend looking at? How is it calculated? Is the data available?
qWhy do think this variable might be associated with a stock market anomaly?
qWhy do investors not pay sufficient attention to this variable, or fail to fully appreciate the meaning of the variable?
qWhat would your trading strategy be? Long which stocks, short which stocks. Why?
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An example: The Bargain Power
qNote: Here is not to describe a working trading strategy, but stimulate you to think about potential trading strategies.
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Related Variables
CRSP/COMPUSTAT
Accounts payable
AP
Accounts receivable
ARC
Cash
CH
COGS
COGS
Sales
SALE
Intuitions
qLooks for companies with increasing (decreasing) bargaining power with suppliers/customers
qProxy for bargain power with suppliers: (Accounts payable/COGS)*(cash/COGS)
qProxy for bargain power with customers: Accounts receivable/sales
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Trading Strategies
qLong portfolio with high positive changes in
(Accounts payable/COGS) * (cash/COGS) / (receivable/sales)
qShort portfolio with negative changes in
(Accounts payable/COGS) * (cash/COGS) / (receivable/sales)
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Another idea: increasing profit margin
qVariable: gross profit/sales (GP/SALE in compstat)
¡ì Long companies with very positive large changes in profit margin
¡ì Short matching companies with decreasing low profit margin (matching refers to the similar asset turnover and leverage)
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Another idea: increasing operating efficiency
qlow profit margin but high turnover: efficient traditional company like Walmart (SALE/AT)
¡ì Long companies positive CF and very high turnover ¡ì Short matching companies with low turnover
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