9/17/2006

How to narrow the number of breakouts- Part 1

Warning: Mostly for beginners and those asking for specific picks. Most of the discussion relates to TC2007. The advanced traders might want to skip it.
The earlier discussion on this is here.

Last week we looked at the long and short breakout in TC2007. If you used that scan on Friday you would get 342 long and 179 short breakouts. Now you have too many ideas to play around with. Now the question is which one should I take. The obvious answers is that which will make the highest profit in the shortest possible time. We will look at couple of approaches to reduce the universe and scans for them.( Note: When I see 300+ breakout, I always feel correction is due. When you start using this scan daily and backtest it over long period you will understand why)

The simplest method to reduce the trading universe is by sorting the stocks based on momentum. Investors Business Daily calls this Relative Strength. Relative Strength basically tells you how a stock is performing relative to an Index. The simplest calculation involves dividing the price performance by an index like S&P for same period. Now this kind of indicator is already built in toTC2007. You will find it under 'System Sorts'(Relative Strength 1-yr(vs S&P500)). You might decide to take only the top 20% or 10% or 2%.

For example if you used top 2% for Relative Strength 1-yr(vs S&P500)you will get only seven breakout to work with. MWRK, IIP, AKAM, RICK, FMD, SWHC, TWTC. (I am sure 99% male will like RICK breakout!! Who doesn't like Cabaret?)

Now there are many other way to find momentum. You can improve your results dramatically by finding a right momentum sort. Now here are some more you can try within TC2007 pre packaged sort. All examples in bracket are taking top 2% and from Friday 15th Sept 2006.

  • 30 day price trend vs market (SWHC, TAR,WLM)
  • Price-1 year range (MWRK, IBKC, PNFP, PZZA, NWN, AKAM, WEBX, IOSP, FMD)
  • Price-3 year range (MWRK, IBKC, PNFP, PZZA, AKAM, WEBX, PSA, UIL, UMBF, NETC)
  • Price as % of 52 week high (MWRK, IBKC, PNFP, NWN, PZZA, UMBF, BUSE, CNF)
  • Price as % of 90 day high (MWRK, IBKC, NHI, ALFA, VGR, FFH, SMTS, TNCC, PHI, PNFP, NWN, SKP, HMN)
  • Price Growth Rate 1-yr (MWRK, IIP, SVVS, AKAM, RICK)
  • Price Growth Rate 2-yr (TWTC, SWHC, PRLS)
  • Price Growth Rate 3-YR (LNG, RIV)
  • Price Growth Rate 5-yr (AKAM, RIV, CRDN, RIMM, LNG)
  • Price vs 200 day moving average (SWHC, MWRK, CRVL, TAR, IIP, AKAM, FMD, SUNH, AUXL)
  • Price vs 40 day moving average (SWHC, MWRK, CRVL, IIP, FMD, AUXL, IIVI, FFH, ARDI, LBY, CAMD, WLM)


All these scan are some way of using momentum to reduce your universe. Now if you use any of these scans consistently and use little bit of gray matter you will find ideas every day. I am even willing to challenge that if you rigorously use any of these scan over a year and marry it with a good risk management you will beat the street. Anyone for a USD 100 wager. Much of the discussion after this is how to look at some more advanced momentum based ideas. It will focus on finding the very best of the best stocks and buy them on or before breakout. Caution, it might be dangerous for your portfolio returns!

I am in the process of shifting office and computers so the next parts may get delayed. I have been preparing this post in Writely and I like that programme a lot.Not a bad idea to keep an eye on Google.
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