Alpha(α) / Beta(β) Multi-Time Analysis

Understanding Alpha (α) and Beta (β) in Simple Terms

What is Alpha (α)?

Alpha (α) is a way to measure how well a stock is doing compared to the overall market, like the S&P 500. It tells you if a stock is performing better or worse than expected, based on its risk. If a stock has a high Alpha, it means it's outperforming the market after considering its risk level.

Formula for Alpha (α):
α = Ri - [Rf + β(Rm - Rf)]

• Ri = Actual return of the stock
• Rf = Risk-free rate (like the return on government bonds)
• β = Beta of the stock
• Rm = Return of the market

What is Beta (β)?

Beta (β) measures how much a stock's price moves in comparison to the market. If a stock has a high Beta, it means its price is more volatile—it moves up and down more than the market. A low Beta means the stock is less volatile and more stable.

Formula for Beta (β):
β = Cov(Ri, Rm) / Var(Rm)

• Cov(Ri, Rm) = How the stock’s returns move with the market’s returns
• Var(Rm) = Variance of the market’s returns

Understanding Alpha (α):

• Positive Alpha (α > 0): The stock is doing better than the market, considering its risk.
• Negative Alpha (α < 0): The stock is underperforming, meaning it's too risky for the return it's giving.
• Neutral Alpha (α = 0): The stock is performing as expected for its level of risk.

Understanding Beta (β):

• Beta of 1 (β = 1): The stock’s volatility is exactly in line with the market.
• Beta greater than 1 (β > 1): The stock is more volatile than the market. For example, if β = 1.1, the stock is 10% more volatile than the market.
• Beta less than 1 but greater than 0 (0 < β < 1): The stock is less volatile than the market.
• Beta of 0 (β = 0): The stock doesn’t move with the market at all.
• Negative Beta (β < 0): The stock moves in the opposite direction of the market.
• High Beta (β > 2): The stock is very volatile, meaning it could offer high rewards but also comes with higher risk.

How Alpha (α) and Beta (β) Help in Day Trading

The Alpha(α) / Beta(β) Multi-Time Analysis is a tool that helps you figure out how well a stock is doing and how risky it is.

• Alpha (α) tells you if a stock is outperforming the market after accounting for its risk. If Alpha is high, the stock is doing better than expected for its risk level.
• Beta (β) measures how much the stock’s price fluctuates compared to the market. If Beta is high, the stock is very volatile—its price changes a lot more than the market’s.

Using Alpha (α) and Beta (β) in Day Trading 

In day trading, you should want stocks that not only perform well but also have significant price movements during the day. By picking stocks with an Alpha greater than 0 and a Beta greater than 1.9 (which works well on 5-minute charts), you’re focusing on stocks likely to outperform the market and be highly volatile. This volatility should be great for short-term trading because it offers more chances to profit from quick price changes.

In my studies I’ve found that while high Beta stocks may offer the potential for higher returns, it also comes with a significant amount of risk. I think it would be smart to balance your portfolio with a mix of high and moderate Beta stocks to enjoy high returns while reducing potential losses. On the flip side, focusing on stocks with positive Alpha can give you steady performance. These stocks are less risky and offer consistent returns, making them safer and allowing you to balance your risk.

A good strategy to follow might be to look for stocks with an Alpha greater than 0 and a Beta greater than 1.9 for long positions on a 5-minute chart. These stocks are more likely to move up significantly in the short term.