Trading Simulation

Abstract

Options trading for a two-week period:

1. Each student starts with an allocation of US$10,000 in play money.
2. You use this money to buy or sell options on S&P500 index.
3. You can make as many trades as you like.
4. Trade wisely. If you run out of money, the game ends for you.
5. The game will only allow trading of S&P 500 index options—no others
6. Student with the highest account value(s) at the end wins.

I. Fundamental Analysis

Fundamental analysis is a technique for determining an asset's inherent value and

researching the variables that can affect its price in the future. This type of study is
founded on outside factors, financial statements, and market trends.

One of the two main approaches to market analysis is fundamental analysis; the other is
technical analysis. Fundamental traders look at elements other than the price
movements of the asset itself, whereas technical traders will get all the information they
need to trade from charts.

Although there are many tools and methods for performing basic analysis, they can be
divided into two categories: top-down analysis and bottom-up analysis. Top-down
analysis adopts a larger perspective on the economy, beginning with the overall market
before focusing on a particular area, industry, or company. Contrarily, bottom-up
analysis begins with a particular stock and then expands to consider all the variables
that affect its price.

I.1 Theoretical methodology

Developed by William O’Neil, publisher of Investor’s Business Daily, CANSLIM isan

acronym which describes picking which stocks to buy which combines severalquantitative
and qualitative factors (Kirkpatrick and Dahlquist, 2010). The breakdownis as follows:

C – Current quarterly earnings per share versus a year earlier

A – Annual earnings increase

N – New products, management, and stock price highs

S – Supply and demand of stock
L – Leader or laggarI – Institutional sponsorship
M – market direction

The rationale behind CANSLIM is to identify stocks which will grow faster thanthe general
market. O’Neil emphasizes that the M should be considered withoutconsidering news or
sentiment about a stock, and ignore economic indicators as well,in favor of looking at price
action exclusively (Broderick and Rogers, 2021).

II. Technical Analysis

Based on market data, technical analysis is a tool or strategy used to forecast the likely future
price movement of a security, such as a stock or currency pair.

The idea that all market participants' aggregate buying and selling accurately reflects all
pertinent information regarding a traded security and subsequently assigns a fair market value
to the security is the basis for the legitimacy of technical analysis.

I selected the moving average, Moving average convergence divergence (MACD) and on-
balance volume (OVE).
 III. Price Patterns

Patterns are various shapes that are created on a chart by changes in asset prices. A line
connecting frequent price points, such as closing prices, highs, or lows, over a predetermined
time is what defines a pattern. Chartists use trends to forecast the price movement of a
security. Patterns are the basis of technical analysis. Regardless of performance, pattern
recognition is the most crucial component of technical analysis. Then, these patterns are used
to find pricing patterns. Technical analysis can help you decide when to buy, but fundamental
analysis can help you decide what to buy.

IV. Active Trading

There are different types of trading in the stock market and their benefits.
-Day trading: Day trading, a.k.a. Intraday trading, is one of the most common types of trading in
the stock market. Although expert traders rely on intraday trading to make higher-than-average
profits, it is also the riskiest. Day traders buy and sell stocks or ETFs (Exchange-Traded Funds)
on the same day. Since day trading means closing the positions on the same day, you do not
need to pay Demat transaction charges.
-Positional trading: Like day traders, positional traders identify a stock’s momentum before
buying stocks. Unlike day trading, you cannot sell first and buy later in positional trading. It is a
medium-term strategy for brave-hearted investors who can ignore short-term price fluctuations
and focus on long-term gains. Positional traders have to pay Demat transaction charges every
time they sell their holdings.
-Swing trading: Swing traders generally analyse the chart in varying durations, such as 5
minutes, 15 minutes, 30 minutes, 1 hour, or even a day chart, to spot the waves of price
fluctuations. Swing trading may overlap day trading or positional trading. Traders and investors
often consider swing trading the most difficult among the different types of trading in the stock
market.
-Long term trading: Of the different types of trading, long-term trading is the safest. This trading
type suits conservative investors more than aggressive ones. A long-term trader analyses the
growth potential of stock by reading news, evaluating the balance sheet, studying the industry,
and acquiring knowledge about the economy. They do not mind holding stocks for years,
decades, or even a lifetime. -Scalping: is a subset of intraday trading. While day traders identify
opportunities and stay invested through the day to make profits, scalpers create multiple short-
duration trades to profit from the waves. A scalper needs to have high observation power,
excellent experience, and an ability to place pinpoint trades.
-Momentum trading: Of the different types of trading in the stock market and is one of the
easiest. Momentum traders try to predict a stock’s momentum to enter or exit at the right
time. The momentum trader exits if a stock is about to break out or gives a breakout.
Conversely, if a stock tumbles, they buy low to sell high.

V. Trading Strategies

A trading strategy includes a well-considered investing and trading plan

that specifies investing objectives, risk tolerance, time horizon, and tax implications. Ideas and
best practices need to be researched and adopted then adhered to. Planning for trading
includes developing methods that include buying or selling stocks, bonds, ETFs, or other
investments and may extend to more complex trades such as options or futures.

There are some trading strategies which I used swing, trend, and day trading strategies.

5.1 Trend following

One of the most effective trading systems involves following these trends: “Ratherthan
attempting to catch the peaks and valleys, the trend-following system acts in thedirection of
the trend as soon after it can be reliably detected” (Kirkpatrick andDahlquist, 2010).
Moving average is the most widely used indicators in trading. The advantage of thisindicator is
that it cuts out the “noise”, or short-term fluctuations in price, of a marketand allows the
investor to get a better idea of which way the price is generally moving(Mitchell, C., 2022).
Common time intervals for Moving Average analyses, known asthe “look back period”, are 10,
20, 50, 100 and 200 days.

5.2 Breakout system

Breakout systems generate buy and sell signals when the price moves out of aparticular band
(Kirkpatrick and Dahlquist, 2006). In order to identify a goodcandidate for breakout
trading, a stock’s underlying support and resistance levels mustbe considered (Chen, 2022).
5.3 Pattern recognition
Pattern recognition is a method of trading that concentrates on the configuration
andcharacteristics of individual bars on a candlestick chart in order to identify good buysand
sells (Kirkpatrick and Dahlquist, 2010). All patterns are composed of an entry andexit condition,
where the entry describes the behavior preceding the trend, and the exit describes the end of
the pattern where action should be taken. The price patternsfound in charts are fractal,
meaning they can occur for any time period.

1. Bear market

1. False breakout for head-and-shoulders top

2. Bearish flag pattern
3. False breakout for rectangle
4. Head-and-shoulders top
5. Top triangle
6. f.Double top pattern

2. Bull market

1. Reversion of Broken bottom

2. Bullish flag pattern
3. Bottom triangle
4. Head-and-shoulders bottom
5. False breakout for double bottom pattern
6. Double bottom pattern

VI. My Trading Simulation (From 20221207-20221218)

VI.1 My trading Strategy

First, I followed the swing strategy. I aimed to buy when I suspected the market would rise and
sell when price will fall. Holding period of swing trading is a few days to weeks, even months at
times, most held for few days, then the number of trades is few. Also, this strategy is suitable
for all, from beginners to moderate and advanced traders. Second, I used the moving averages.
These strategies involve entering a long position when a short-term moving average crosses
above a longer-term moving average or entering a short position when a short-term moving
average crosses below a longer-term moving average. Alternatively, some traders may watch
for when the price crosses above a moving average to signal a long position, or when the price
crosses below the average to signal a short position.

Moving Average
I bought bot 5 /ESZ22:XCME1/50 DEC22 (Wk2) Call option @23.25 at $3970 price.
I think S/P 500 is now run right up to the top of this downward trend line which has been in
place since way back at start of January 2022. Last week I thought that we may have seen more
of a pullback towards these moving averages, then it started getting a pullback and that
pullback was not long-lived. Also, I saw the pullbacks being relatively shallow and buying
interests coming in to underpin those pullbacks. Another reason is in the price action over the
laws 2 weeks are that the market broke up from this little triangle range. It’s always interesting
to look at the charts and spot these patterns. So, this classic tringle trading range and it gives
me a guide. I think measure the width of the range and then I project that high from the
breakout point, so I can see that it gives a level up around below 4,200 . So, I decided to buy.

13th December 2022, at 9.30PM it was high price, I missed the best time to sell, so I sold some
of my option after high price day. I thought sold the few, that it was right decision to sold at the
time. Because I saw cup and handle pattern, which resembled a cup and handle where the cup
was in the shape of U and the handle a slight downward drift. So, I thought price would be
higher twice.

Then after a day I sold, I bought one option again because I still though price would be higher
than first, I bought. But I did think wrong. As we see now price is still going down and my time is
expired. My mistake was when I sold the option at high price, I had to sold more of them and
had not to buy again.

Technical Analysis S/P 500

Period Moving Average Price Change Percent Change Average Volume
5-day 3950.73 -82.02 -2.08% 0
20-day 3982.39 -94.20 -2.39% 0
50-day 3863.82 +107.84 +2.88% 0
100-day 3928.99 -171.25 -4.26% 0
200-day 4027.12 -511.13 -11.71% 0
Year-to-Date 4108.43 -913.82 19.17%

Trading Activities
This is my final result.

Reference
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Mitchell, C. (2022, April 8).How to Use Moving Average to Buy Stocks, Investopedia.
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