R Tutorial : Why do people trade?

Key Takeaways

before to do some quants trip let's establish the reasons people trade and what a trade is first and foremost a trade is simply the act of buying or selling an asset whether that's a financial security such as stock that is ownership of a company's equity a bond that is ownership of a company's or government's debt or a tangible physical product such as commodities like gold oil metals and corn and this is done through converting cash such as dollars into ownership of this product and either converting the product such as sit shares in the company's stock back in the cash hopefully for a profit or actually taking delivery of a physical good such as an oil company taking a shipment of crude oil free Fineman while making a profit from acting on creating opportunities is one reason for trading there are others certain companies whose business revolves around commodities and they're the financial markets to protect themselves from the business impact of price movements of an underlying commodity for example Hershey's might want to establish a good price for chocolate airlines want to minimize the impact the price movement of oil has on their business and so on for instance if the price of oil arises too much an airline doesn't protect itself against that it would either have to raise ticket prices while its competitors don't or make a lot less profit large financial institutions might want to increase or decrease their exposure to various sources of returns and the riskiness that comes with them at the heart of the matter is that financial instruments bear risk and a payoff allegedly for bearing that risk the aim of a systematic trading strategy is to make an educated guess as to when the ratio of reward to risk is favorable enough to bear the risk and in turn gain compensation while not bearing that risk when the compensation is insufficient in terms of the mechanics of trading there are essentially two types of trades divergence also called momentum or trend trading is the belief that a quantity will continue to increase or decrease if it has already been increasing or decreasing respectively a class of hedge funds known as commodity trading advisors or CT AAS have made a lot of money on proper trend-following trading techniques these classes of strategies are characterized by suffering small losses in trennis markets while making a great deal of money when a trend establishes the opposite style of trading is convergence meaner version oscillation or contrarian style trading this type of trading philosophy is one that attempts to predict when a certain quantity will reverse direction for instance the famed warren buffett its value investing philosophy is one that buys companies after the price has suffered a considerable amount of depreciation in the hopes that this price depreciation has mostly run its course and will reverse the near future contrarian trading styles were classified by many small gains while suffering the occasional larger loss when entering the depreciating position too early let's move on to some exercises