Nevertheless, this episode illustrates one of the risks of algorithmic investing. An algorithm does not think; it only operates within the confines of a rigid set of instructions. In this case, the algorithms got burned. Now, somebody owns millions of shares of a company that is all but worthless. Almost all of that will eventually be written off as the cost of doing business. We've seen this same type of mistake made before. Three years ago, a company previously known as Long Island Iced Tea changed its name to Long Blockchain (OTC: LBCC) to cash in on the cryptocurrency craze. Bitcoin (BTC), and all cyber currencies, rely on blockchain technology to protect the value of their currencies. Within days, Long Blockchain's share price tripled in value as algorithms searching for blockchain stocks snapped up the stock. After spiking above $9 in December 2017, one year later LBCC was trading for fifteen cents. A Chip Off the Old Block In this case, the correct stock was identified by the algorithms. However, the company in question had no blockchain technologies of its own to sell. The trading algorithms that bought the stock based on that news took a bath. Fortunately, it was a very small company to begin with so the amount of money at risk is relatively small. But what if the mistake had been far larger? For example, over the past week shares of Indian automaker Tata Motors (NYSE: TTM) jumped 25% on rumors that Tesla may partner with Tata to build its electric vehicles for the Asian market. If true, Tata deserves its higher share price. But if false, then more than $2 billion of investor capital may have just been wasted. Thus far, Musk has not confirmed or denied this rumor. But if he ends one of his tweets with "Tata for now," don't be surprised if TTM suddenly surges in value. Trading on headline news is not a wise way to make money in the stock market. Instead, I suggest using a proven methodology based on logic and facts. Which brings me to my colleague Jim Fink, the chief investment strategist of Velocity Trader. Jim Fink has devised a scientific trading method that consistently outperforms, in markets that are going up, down or sideways. In a new presentation, he explains how you can turn $5,000 into $255,000 in the next 12 months. Jim has used his proprietary investment system to personally amass a $5 million fortune. Want to learn Jim's secrets? Click here. |
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