1/11/2007

How to beat the market for $1.25 per week

The majority of emails I get are of three types, first is about how to find good stocks, second is do you have a newsletter and the third is some newsletters or their followers excitedly touting their stock picking skills, . Most of these newsletters have below market returns but they have vast followings.Newsletter writers are good marketers not necessarily good traders.
So to answer the question about how to pick good stocks here is a very simple system which will beat most newsletters and all it costs is $1.25 per week.

How to beat the market for $1.25 per week

Difficulty: Moderately challenging
One of the most important parts of 'playing the market' is finding companies likely to go up.

Instructions

* STEP 1: Obtain Investor Business Daily for Thursday for $1.25
* STEP 2: Go to page B5. Look at the list of IBD's Top 200 Composite Stocks
* STEP 3: Put this list in watchlist.
* STEP 4: Everyday identify companies from this list which had price increase of 2%, minimum volume for the day of 100000 and volume for the day is above yesterdays volume.If you are using TC2007 use this scan-
( 100 * (C - C1) / C1) >= 2 AND V >= 1000 AND V > V1 or ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1
* STEP 5: Buy next day with 1% risk
* STEP 6: Trail with a stop
* STEP 7: Enjoy your profits

Tips & Warnings

* Keep the stocks in watchlist for 4 weeks
* Look at the new additions to the list every week. Keep a close watch on them.
* All major winners in a year appear on this list. Stocks that go on to IBD 100 first appear here.

These are the kind of stocks you would have found using this in last 65 days. All of them up more than 20% since appearing on the list, many are up over 100% in one quarter.
AFAM,Almost Family Inc (Google  Yahoo  Earnings BW  Chart)
AOB,American Oriental Bioengineering Inc (Google  Yahoo  Earnings BW  Chart)
ATNI,Atlantic Tele-Network (Google  Yahoo  Earnings BW  Chart)
AXR,Amrep Corp (Google  Yahoo  Earnings BW  Chart)
CHINA,CDC Corp Class A (Google  Yahoo  Earnings BW  Chart)
CPA,Copa Holdings S.A. (Google  Yahoo  Earnings BW  Chart)
CRVL,Corvel Corp (Google  Yahoo  Earnings BW  Chart)
DAKT,Daktronics Inc (Google  Yahoo  Earnings BW  Chart)
DLB,Dolby Laboratories Inc (Google  Yahoo  Earnings BW  Chart)
FTEK,Fuel Tech Inc (Google  Yahoo  Earnings BW  Chart)
GLDN,Golden Telecom Inc (Google  Yahoo  Earnings BW  Chart)
GRC,Gorman-Rupp Co (Google  Yahoo  Earnings BW  Chart)
GROW,U.S. Global Invest Inc A (Google  Yahoo  Earnings BW  Chart)
GSOL,Global Sources Ltd. (Google  Yahoo  Earnings BW  Chart)
HMIN,Home Inns and Hotels Management (Google  Yahoo  Earnings BW  Chart)
HRT,Arrhythmia Research Tech (Google  Yahoo  Earnings BW  Chart)
HXM,Homex Development Corp (Google  Yahoo  Earnings BW  Chart)
ICE,Intercontinental Exchange Inc (Google  Yahoo  Earnings BW  Chart)
IGLD,Internet Gold-Golden (Google  Yahoo  Earnings BW  Chart)
MFW,M&F Worldwide Corp (Google  Yahoo  Earnings BW  Chart)
MGM,MGM MIRAGE Inc (Google  Yahoo  Earnings BW  Chart)
MICC,Millicom Intl Cellular Sa (Google  Yahoo  Earnings BW  Chart)
MR,Mindray Medical Intl Ltd (Google  Yahoo  Earnings BW  Chart)
ROCM,Rochester Medical Corp (Google  Yahoo  Earnings BW  Chart)
STEC,Simple Technology Inc (Google  Yahoo  Earnings BW  Chart)
SVNT,Savient Pharmaceuticals Inc (Google  Yahoo  Earnings BW  Chart)
SYX,Systemax Inc (Google  Yahoo  Earnings BW  Chart)
TTEC,Teletech Holdings Inc (Google  Yahoo  Earnings BW  Chart)
UCTT,Ultra Clean Holdings (Google  Yahoo  Earnings BW  Chart)
UUU,Universal Security Instruments (Google  Yahoo  Earnings BW  Chart)
VOL,Volt Info Sciences Inc (Google  Yahoo  Earnings BW  Chart)

In last one year I told about this to 38 people who asked for newsletter or asked about finding good stocks. Only 2 people religiously follow it week after week. I gave away this information free, so that might be the reason no one followed it.

Coming next: How to sell a newsletter to thousands without beating the market......

Other posts in this series:

How to beat the market for $1.25 per week- Part3

How to beat the market for $1.25 per week- Part2
How to beat the market for $1.25 per week


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59 comments:

fastflair said...

I'm still relatively new to trading, what does buying with 1% percent risk mean as mentioned in step 5? A 5% trailing stop makes sense to me. Does a 1% risk mean selling if the price falls 1% below the initial buy price?

Pradeep Bonde said...

If your acount is 100000, 1% of that is 1000. Now of you are buying a XYZ stocks which is for simplicity say 20 dollar and your stop is 19 dollar(5% trail). That means you can buy 1000 shares of that stock and if you get stopped out your risk will be 1% of your portfolio that is you will lose 1000 dollars. So you will buy 1000*20= 20,000 worth of stock.
Instead of 5% if you use volatility based stop it will be better, but simplicity is the key.

65Trader said...

pradeep - Wow, it sounds like that is a very simple but effective strategy. Can you give us an idea of the annual return of this strategy? If all those stocks are up an average of 20% in 2 months, that would be about 100-120% Just curious, and thanks for sharing your blog. I just found it, and I find it highly informative!

Pradeep Bonde said...

How much you can make from the strategy is a function of how sincerely and religiously one follows it. All the major winners which make 100% plus kind of moves in a year will appear on the list if the move is earning related.

This quarter was any way market rally time, but even when market does not rally, you will find enough stocks in this list making 20% plus moves.
If one plays around and modifies entry criteria or plays around with holding periods, one can get higher returns.
The critical thing is to understand why that particular list. What is special about it. If you understand why it works, you will have better conviction in trading it.

paulin said...
This comment has been removed by the author.
65Trader said...

I can think of 2 reasons why it works - 1 is that you are catching stocks as they are added to the IBD100, 2 is just that these stocks are movers because they have good earnings. Hey, today's Thursday. Maybe I'll go down to the bookstore and pick up a copy...

fastflair said...

Thank you very much for the clarification on % risk!!! That is very much appreciated :)

Pradeep Bonde said...

There are more reason why it works. I will have a post about it sometime later this weekend and more ways to time entries.

Amit said...

Thanks for this article and generally for blogging ! :)

65Trader said...

After reading your older blog posts, I can see why this strategy works - the IBD 200 list screens for stocks with strong earnings, and by taking the top movers for each day, we are screening for momentum. Pradeep, you have written on many occasions that these 2 factors have the most impact on a successful trading system.

I don't have TC2007, but I did enter all the stocks on the list into Google portfolio. You can sort the list by % change for that day. A quick glance at the chart will show you what volume is doing.

I guess I will have to keep track of the new additions from week to week to see what effect they have.

Pradeep Bonde said...

I will have a post on this at the end of the day today which I am working on currently which will answer why this list and a weekly summary of what happened in the list since last Thursday. I have researched it on many years of data and it is the simplest and most easy way to trade if you have limted time. Plus it beats the pants off most complex systems I have seen. Plus it will beat 99% of the newsletter if implemented properly. All that for $1.25 per week!!!

Art said...

As IBD posts their excel spreadsheets for the IBD100, Screen of the Day, Canslim Select, etc. Do you know if they post a spreadsheet for the Top 200 Composite Stocks on Thursday? If they do I cannot seem to locate it anywhere?
Thanks
Art

Pradeep Bonde said...

No. There is no excel file for it. The list contains stock with 96 plus composite rating, so if you have subsription to IBD tables it can be imported after sorting by composite rating and taking the 96 plus rated stocks

Art said...

65Trader said... I did enter all the stocks on the list into Google portfolio. You can sort the list by % change for that day....

Paradeep do you know if there is a PCF in TC which would allow us to sort this Top 200 WatchList by the percentage change for that day?

Thanks
Art

Pradeep Bonde said...

You can use the in built scans like "Price Percent Change Today"

Michael said...

Pradeep

In your post about how to beat the mkt for $1.25 per week, you said that one of the criteria should be that today's volume is greater than yesterday's volume.

What if yesterday's volume number was greater than today's volume, but it was negative?

For example, CYTR had an increase of 5.1% on 3/15/07, Vol was >100K (actually 960K), however, the previous day’s volume (3/14) was 1.1 million, but it was selloff volume. In other words, is a smaller positive volume OK when compared to a greater negative volume from the day before?

thanks for any info

Mike

Pradeep Bonde said...

No. The volume condition has two parts

V >= 100000
Today's volume >100000
AND
V > V1
Today's volume is greater than yesterday's volume.

So in your CYTR example the conditions will not be true.
The enry criteria I mentioned is indicative and you can experiment with it to find better entries.

Michael said...

Thanks Pradeep-

Now I have another question, regarding your step 6 "Trail w/ a stop". Since some of these stocks seem to be pretty volatile, do you typically use a big trail stop, say 5-6%? Or do you use the low of the previous 1 or 2 days price bar and change this every day?

ALso assuming you are not stopped out by this time, do you ever sell when the day's volume becomes less than the previous day's volume (even if it is still positive)?

Figuring out when/how to exit is something I seem to be having a lot of trouble with.

thx Mike

Pradeep Bonde said...

There are two elements to my stops and exit strategy. Time stop and risk stop.
The starting stop I use is at 2 days low and also a time stop, which means if the stock does not move beyond the high of breakout price in 5 days I get out, even if it has not hit risk stop. After five days I trail with 5% stop and move stops strategicaly if there is second high volume breakout day, then again I will put stop below two days low and time stops. Once position acheves 20% profit I trail with a 10% stop but protect 20% profit. So the stop will be at 20% profit but once stock crosses 30% level I trail with 10% stop.
I might also liquidate my position if I see the overall market weakening. Especially in late rally stage ( where market has rallied more than 6-8 months) or if the 50% plus in a month indicator moves beyond 20. Position might also get liquidated , if I find a new Episodic Pivot based idea, which I believe has better prospect.
There is also a overall portfolio stop. That is the amount of total portfolio at risk. So if that gets hit all positions get liquidated.

The Sound said...

pradeep

Thank you so much for this. I'll set it up this Thursday. I appreciate it.

Tom said...

Pradeep - I happened upon your blog tonight and have found it very insightful for a new trader like me. Just curous, do you use hard stops or mental stops? I like your "keep it simple" approach to trading!

Pradeep Bonde said...

Hard stop.

Albert S. said...

Hey, This is truly very valuable information. I have a few of questions:
1) You mention running a scan if one has TC2007, I have ScottraderELite and have no idea on how to input the scan. Can you recommend another way of scanning for the criteria you suggest?
2) How would you recommend selecting which equities to get into? Does one pick the top 5, 10, 15 or is this depending on the capital available to invest?
3) Lastly, I see you mention pyramiding up in one of the later posts regarding this topic. Have you seen the jumps made by these stocks come within the 1st week they show up on the list? This way I can determine what initial position to have and how to escalate from there.

Thanks again for the information.

Pradeep Bonde said...

Thanks
1 If you understand the parameters, you can do this in any software.
( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1
C= Today's price
C1= Yesterday's price
V= today's volume
V1= yesterday volume
1000= 100000 shares
2 Use float to eliminate candidates. Take he one with lowest float. Use a weakness of 65 days as another criteria. Pick which had least 65 days growth.
3 Pyramiding basically involves adding risk units as stock progresses. Judicious pyramiding adds new capital only up to a certain level and still manage the overall risk to 1-2 % of portfolio. Unless one has lot of experience first of trading these kind of stocks and understanding of market cycles, one should not attempt pyramiding. IMHO

Albert S. said...

Thank you for responding so quickly. I think I asked the wrong question.

How does one get the information into a software that the formula to pick out the candidates? Does one have to manually enter all the information daily into an excel spreadsheet? If I understand correctly, your TC2007 software has the stocks from the IBD 200 or you have a watch list that you can enter all 200 ticker symbols.

Can you also please explain using the float to select candidates. I am not familiar with this or the 65 day criteria.

I currently use pyramiding in build my position, 50-20-20-10. My question is what do you suggest the initial buy in be on these stocks.

Thanks again for all the information you provide and the time you put into answering our questions. By the way, I utilize the premium tools in IBD if you feel there is something there that may help me in selecting these stocks.

Pradeep Bonde said...

1 IBD 200 appears in the Thursday edition. I data enter the list in TC2007, basically by eliminating dropouts and entering the new entrants.

2 Float is the number of shares actually available for trading in the open market.
Float figures are dynamic and all data sources like TC2007, IBD, Yahoo, Moneycentral, Reuters, etc have float figures for stock. When faced with a choice of 5 breakout in a day choosing the ones with lowest float can improve your returns. But low float stock are more volatile and in a down market you can loose more.
You can study the IBD 200 over years and you will find the stocks with float below 10 million outperform the higher float ones post breakout by significant margin for 2 to 6 month holding periods. I have not updated my float study for many months now but the out performance is in the range of 2 to 3 times the return of higher float stocks for same holding periods.
65 day growth is basically the price change in 65 days. When you choose the stocks with lowest 65 days growth, most probably you will be catching the usual chart patterns like cup with handle, flat bases and double or triple tops at higher end of range. As low 65 days growth indicates stalled action.
c/c65.1 can be the simplest formula for this.
So first sort by float and then by 65 days growth to eliminate candidate for entry.

3 Risk should stay 1-2% of your equity in spite of pyramiding. The way this is done is by calculating the open profits in position and adjusting the position size to reflect that plus new position, to finally keep risk at 1 or 2%. At least that is the way I do it. So one pyramids but still keep the capital at risk at 1% of total account.

4 If you use IBD premium tools, choosing stocks with composite rating of 96 plus will give you the IBD 200 list. Float figures are also in every IBD daily Graph Database.

Albert S. said...

Ok, I broke down and got TC2007 to see how your scans work.

Do you happen to have a post which puts into some sensible prespective how to input the scans you suggest on this blog? And maybe something on how to best utilize this service.

Thanks again!

Sky said...

Albert
Sometime ago I had the same question myself. However I have discovered that everything you need to understand this trading methodology and how to implement it using TC2007 and IBD can be found by digging through the archive of Pradeep's posts. I strongly recoomend you systematically review the archives starting from at least 12 months ago. Happy reading :-)

Pradeep Bonde said...

Albert
Here is simple step by step process

1 Get IBD list. Data enter in to tc2007

2 Scan everyday with
( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1
3 Sort the output by float. Select the 5 with least float
4 Sort the five by 65 days growth
c/c65 choose the ones with lowest growth.
5 Risk 1% of capital. Stop at 2 days low.

Albert S. said...

Pradeep, thx for the quick setup. I am having a hard time inputing the parameters into the scan of TC2007. I have the data (stock symbols) in a watch list already. I just need to enter the parameters in order for it to spit out the info you are saying to look for.
I have also been looking through previous posts regarding how to enter scans into TC2007 with no luck.

Pradeep Bonde said...

1 Locate fx on tool bar it will open Personal Formula criteria
2 next to Persona Formula there will be icon for name criterion open it give a name for scan "breakout" Press ok
3 enter formula save
4 Go to databank locate Personal Formuals. Click ok. Update all criteria.
5 now sort your ibd 200 list by the breakout

Albert S. said...

Think I got it. Let me just verify that what I did is correct. I followed everything then created an easy scan to run both the "breakout" and the "65 day growth" formulas which then created a new watch list. The following are 6 stocks that fit the parameters:
Float 65-Day
POT 102.9M 1.25
ICFI 5.69M 1.29
ACH 437.6M 1.34
HWCC 14.8M 1.43
GLBL 87.2M 1.60
TSO 63.5M 1.68

Assuming today was Thursday and I just got this list. I would then invest 1% of capital into ICFI @ $19.40(current price) with a stop loss at $18.56 (2-day low).

Does this sound about right?

Pradeep Bonde said...

Can someone comment on this as I have already loaded Todays list and getting different candidates.

m said...

Pradeep, with your recent blog on Float, do you apply float and 65 day weakness to the IBD200 strategy or just follow the steps you had in the IBD blog? Or do you just apply float and 65 day weakness when it comes to if the IBD 200 stock has earnings announcement? Thanks!

mrstrader said...

This comment is with respect to the post above on ICFI. Now I own that stock so I happen to know they are reporting Monday after close. I would be careful with the candidates generated that are running up BEFORE earnings, but would welcome any comments/suggestions to the contrary.

Pradeep Bonde said...

Once I run the scan, to eliminate candidates first run 65 day growth filter, next float.

Glenn said...

Pradeep - I just loaded the Telechart. Could you help me by listing a the 5 stocks for any day starting 5/21. I'm not sure I got the float and c/c65 right - I just need one day to compare.

Kris said...

Hi Pradeep:

I used your formula ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1
Created a new PCF 4% Breakout , re-calculated the IBD 200 for this pcf. I got only 5 stocks and I did the same with another PCF for 2% breakout. In both the cases, I never got your 27 stock selections. Why the difference?

I do not understand how I can get a different list from the same IBD 200 list using the same TC2007, using the same formula from your post ( I copied and pasted it after I called for a new PCF)

Thanks.

Pradeep Bonde said...

I have sorted by 65 day growth not by 4% breakout.

Susan said...

if the lower limit is 2% increase in price, is there a upper limit? I mean, say if the stock jumped 50%, would you still enter next day?

Pradeep Bonde said...

Yes.

Dustin said...

How long do you keep the stocks in your portfolio? Do you sell them once they fail to continue to meet the 2% increase and volume criteria?

Thanks

Pradeep Bonde said...

Till I get stopped out. Sometime it is days, sometime it is months.

Peter said...

Hi!
Thanks a bunch for the great tip/lesson!
I have a couple of questions:
1) on page 5 of IBD/Thu ed., there is also a list of 200 worst performers. Would a reverse scan uncover possible rallying candidates? Perhaps scan for recent prices dipping to the same level twice (or more), to find double/triple bottoms, and combine with strong fundamentals, etc...
2) Do you have any use for the WSJ top performing stocks (a family member has a suscription and I would like to take advantage, hmmm...)
Thanks again!

Pradeep Bonde said...

Thanks
1 Possible to find contrary picks in it.
2 I have not looked at it.

godtomsatan said...

I know the market has been quite volatile of late, but I've been taking a beating with using this system over the last month. I'm down almost 20%....

HnJ said...

Hi Pradeep,

Do you mind to share your excel spreadsheets? I really love your mechanical approach towards the market.

Thank you.

Vishal said...

godtomsatan, u have to be very careful what stocks u pick. Just because they blow out earnings does not mean they will automatically go up. Whats even more confusing is that many of the smallcap blowouts actually did go up a lot in the first few days, but then collapsed. This earnings season has been a "sell the news" season. Mother Market really has punished the smallcaps ( < 2 billion marketcap) & rewarded the mid & bigcaps (that have reported earnings blowouts). That might change next season, but until then it might just be better to wait on the sidelines for a high volume breakout a few weeks post earnings.

Doug said...

I know I am a Johnny come lately...but, would scanning the IBD 100 yield similar results? I only ask because I have easier access to back issues containing the 100. Also, just to clarify, this method works across various market conditions?

Thanks.

Doug said...

If the IBD 100 were used instead, would one expect to find similar results?

Pradeep Bonde said...

Yes you can use it on IBD100 also. In bear market you will not get many breakouts. So anyway it will keep you away from the market. If you have access to Telechart or Amibroker or other such software then you can generate your own 100 stock list using momentum and you don't need to trade this method. See my recent series of posts on how to trade momentum.

Doug said...

Just read the second part. Forgive the previous question and keep up the good work!

Michael said...

Hey, I found this post to be great. The only thing I didn't understand from this series was the "stop at two days low" as I am not sure what that means.

To help readers implement it, I did some video walk throughs to help them do it on IBD. If you think it is worth linking to it would be great if you'd link to it within an article as that would help more readers find it. Here's the info:

URL: http://stockmarketinvestingtoday.com/stock-market-investing-for-beginners-using-the-ibd-200/

Anchor text: stock market investing for beginners using the IBD 200

If you don't feel it's link worthy that's ok too.

In any case, I love your blog and have read a bunch of it so far.

Pradeep Bonde said...

Two days low means the lowest price in last 2 days of trading for that stock.

thebanker said...

I think this is a great post. What is great about it is that it is simple and seems sound. The only problem I have with it is that no one has seemed to test it and came back with any results. There was one reader above who said.

Comment above: I know the market has been quite volatile of late, but I've been taking a beating with using this system over the last month. I'm down almost 20%....

And not any readers who came around and said they actually implemented it and had great results.

I don't fault you for that though as the one problem with good ideas is that no one seems to apply them.

I've decided to actually do a case study, or challenge so to speak, where I buy 100 of these types of stocks in a simulator to test and refine this strategy for my own purposes.

The absolute fantastic thing about this is that it reduces the market down to 200 quality stocks and puts them in a list that prunes itself so you don't have to weed them out on your own. That's a great feature in its own right.

You say that we do need to play around with the entry criteria and so here is what I've decided to do -- combine your approach with the entry criteria that O'Neil recommends in CANSLIM as well.

I'm not saying that what follows below will work, but only that its what I am going to do.

Step one: Each day, find the stocks that have 2% price increase on 100% increase in volume and over 100,000 in daily volume.

Step two: Take those stocks and select the ones that have at least a 25 percent increase in earnings and sales in the latest quarter.

Step three: Identify those stocks that have SmartSelect ratings of at least 80 for eps and rs and A or B rating for the SMR, Acc/Dis and Group RS.

If there are more than one choice I am taking the one with the highest earnings at the end I take the one with the highest earnings.

If none meet the screen, I won't take any.

Once I have my stock for the day, I then am buying a $1000 worth of stock in a stock simulator to see what happens.

Since I am going to do this for 100 trading days, this will give me a host of stock trades of my own to analyze and review my mistakes and see what kind of results I get.

In so doing, by simulating this first, it will allow me the chance to figure out what other decisions I need to make in the process as I go along so that before I invest in real cash, I'll have the kinks worked out.

I'd love your input as I go along since it's your strategy I am following. I've started posting my daily screens over at http://www.stockmarketinvestingacademy.com.

Once the project is complete, then you'll have a reader that can come back here and tell your readers of this strategy what they learned by taking action.

Dirk said...

Pradeep,

in your Mar 17th comment you said regarding exit strategy: "There are two elements to my stops and exit strategy. Time stop and risk stop.
The starting stop I use is at 2 days low and also a time stop, which means if the stock does not move beyond the high of breakout price in 5 days I get out..."

What did you mean by 'beyond the high of the breakout'? How do you determine this?

Thanks
Dirk

Pradeep Bonde said...

Let us say a stock was trading at 20 and on breakout day it went to 21. In 5 days if the stock does not go above 21 then the time stop gets activated.

Dirk said...

Thanks Pradeep,

Could you give any pointers for determining when a breakout day took place?

Thanks
Dirk

Pradeep Bonde said...

( 100 * (C - C1) / C1) >= 2 AND V >= 1000 AND V > V1 or ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1
the day the stock meets the above scan condition is breakout day.