To The Moon

A friend told me yesterday that trading has been exhausting lately—U.S. stocks are going up one day, down the next, struggling to break higher. Meanwhile, China’s A-shares wiped out a month’s gains in just three days, leaving many traders feeling lost.

That got me thinking:
What if there’s no beta return this year? How do we find alpha?

Understanding Alpha and Beta

🔹 Alpha (α): If your stock rises 15% while the market gains 10%, or if the market drops 5% but your stock still gains 5%, that extra return is alpha. It comes from stock-picking skills, trading strategies, or investment decisions—independent of overall market trends.

🔹 Beta (β): If your stock or fund moves in line with the broader market (e.g., $S&P 500(.SPX)$, $NASDAQ(.IXIC)$), that’s beta return. For example, if the market rises 10% and your stock does the same, your gain is purely from beta, not from superior investing skills.

Think of the stock market as a river:

• Beta return is like the river’s current—if you go with the flow, you’ll move forward even without rowing.

• Alpha return is your ability to paddle—if the river isn’t moving, you can still make progress.

• The best investors leverage both—riding the current (β) while rowing effectively (α) to outperform.

Using Beta to Gauge Market Phases

Sometimes, beta helps us assess the market cycle:

• When even amateur investors are hyping up crypto stocks, urging you to buy, it could signal an overheated market driven by beta.

• When those same people start cursing crypto and regretting their trades, the market may be at a relative bottom.

Most investors survive on beta because only a few can consistently generate alpha. But when beta is weak, how can we boost overall returns?

Strategies to Find Alpha

If you’ve been in the market for a while, you’ve likely heard of these "magic" trading methods:

1️⃣ Trend Trading

📌 Moving Average Strategy – Buy when the stock price rises above key moving averages (e.g., 5-day, 10-day, 20-day, 60-day); sell if it drops below.
📌 Breakout Strategy – Buy when a stock breaks past previous highs or key resistance levels (e.g., neckline, consolidation zone).

2️⃣ Swing Trading

📌 Double Bottom / Head-and-Shoulders Reversal – Enter when a bottoming pattern confirms an uptrend.
📌 Range Trading – Buy near support and sell near resistance within a price range.

3️⃣ Short-Term Trading

📌 Limit-Up Strategy (less relevant for U.S. stocks) – Buy strong stocks hitting consecutive limit-ups.
📌 Leader Strategy – Focus on the strongest stock in a hot sector, buying early and scaling in on dips.
📌 First Limit-Up Entry – Buy at the first daily limit-up, aiming for next-day gains.

4️⃣ Volume & Price Strategies

📌 High-Volume Breakout – Enter when price breaks key resistance with strong volume.
📌 Low-Volume Pullback – Buy when price pulls back on low volume but holds support.

5️⃣ Sentiment-Based Trading

📌 Market Emotion Cycle Strategy – Buy at peak fear (bottoms) and sell during extreme hype (tops).

Adapting These Strategies to U.S. Stocks

I’ve tried all these methods, and while they work in some markets, not all of them apply to U.S. stocks. For example, the limit-up strategies are less effective since U.S. stocks don’t have daily price limits.

From my experience, trend trading, swing trading, volume-price analysis, and sentiment trading work universally.
Two common ways traders seek alpha in the U.S. market:
1️⃣ High-frequency technical trading – Using short-term price action to capture small price gaps.
2️⃣ Event-driven trades – Capturing short-term opportunities in trending themes (e.g., quantum computing, robotics, or TEM plays), which have delivered 20-50% gains in a short time.

The Alpha-Beta Portfolio Approach

When the market lacks clear beta trends, consider combining A (Beta) + B (Alpha) strategies:

• A (Beta): Hold a core position in broad-market indices (e.g., S&P 500, Nasdaq 100).

• B (Alpha): Use active trading strategies to generate additional returns.

This hybrid approach is similar to enhanced index funds, where 80-90% is invested in the index, and 10-20% is actively managed.

• Pros: Gains exposure to market beta while generating extra alpha.

• Cons: Limits downside risk, preventing excessive drawdowns.

Lately, I’ve been rotating through smaller stocks in search of alpha, even in Nasdaq’s choppy market. Thinking about your own trading style in this context might give you new insights.

So, how are you navigating this market? 🚀