GeWorko Method - Portfolio Trading


The classic analysis of the price chart is the essential part of the intraday trading. Even fundamental investors who examine the timeframes of several months and years use the basic trend analysis for testing their ideas and proper risk hedging. Sluggish stock market features, its partial efficiency was discovered in the 80s of the 20th century. One of the explanations for the market ability to maintain the movement direction when fundamental factors are weakening belongs to George Soros: his theory of reflexivity of stock markets ("The Alchemy of Finance"). The basic idea of it asserts that the behaviour of market participants is affected by expectations of price movements and psychological inertia, which results in the trend retention.

In this overview we would like to present the opportunity of creating personal composite instruments, and also the methods of predicting their fluctuations on the basis of technical analysis. Here we consider four CFDs: wheat, cotton, frozen beef and Dow Jones Industrial Index (DJI). We will create the following personal composite instrument PCI GeWorko: portfolio [wheat + cotton] quoted against portfolio [DJI + frozen beef]. The weighting is equal: 25% for each asset. At first, we would like to describe briefly current fundamental trends and events which influence the price fluctuations of the given assets.

Let us consider the application of portfolio theory by creating composite instruments. In this article, we will show how portfolio trading, implemented by using PCI GeWorko technologies, allows reducing investment risk.
The main criterion for evaluating a trading deal is the relation of potential profits of an asset and risks, taken by the investor. Portfolio analysis involves a statistical analysis of available assets, their interrelations and the composition of a combined instrument, which corresponds to maximum risk-return ratio. This article uncovers the analysis method of Sharpe, based on the market index S&P 500. All considered instruments have been created using GeWorko technology. Open the article

The global financial crisis of 2008 affected all sectors of economic activity with no exception. It affected the business performance of companies both directly and indirectly, but the level of impact was different. This fact provides broad opportunities to find investment strategies based on differences in the long-term price reaction of, for instance, stocks on the same systematic factor.

Suppose that an investor is really ready to accept a higher risk level for increasing the expected return of the portfolio. Let the maximum acceptable standard deviation of the return of the portfolio be 2.5%. We will carry out the optimization procedure of weight coefficients for searching for the maximum return of the portfolio with an additional restriction on the standard deviation (it should not exceed 2.5%)

Searching for an optimal structure of assets in a portfolio is, by all means, not a simple issue. On the one hand, much depends on the parameters of the assets, included in the portfolio and on the other hand, on investor’s individual preferences and restrictions. However, modern financial theory and new analysis and trading methods considerably simplify that process.
GeWorko method can serve as an example of modern portfolio theory implementation, which allows constructing and analyzing numerous variations of portfolios, created from a wide range of assets. And the value of analysis capabilities lies in not only following the changes in the absolute price of the portfolio but also in studying the behavior of the portfolio in relation to the whole market or, for example, to an alternative portfolio, which allows making investment decisions in a timely manner. The result of the method appliance comes to be the creation of a new financial unit – composite instrument (PCI – personal composite instrument).

GeWorko method allows you to construct any combination of assets from a set of available instruments. In this article we would like to draw attention to the U.S. stock market, choose a few securities, build a chart of the resulting portfolio and analyze its behavior over several recent years.
As known, the financial crisis that erupted in 2008, has led to serious consequences for the global financial system and significant losses to investors. For four and a half years the world has been trying to recover, and only recently signs of economic recovery in the world's largest economy - the United States - have begun to appear.

Modern portfolio theory suggests significant benefits from diversification. Using GeWorko method toolset we would like to show how exactly an investor benefits from diversification. For this example we have chosen two well-known securities included in the index Dow Jones Industrial Average.

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