IBD 200 | stockbee

5/17/2007

IBD 200

Why IBD 200 is the question often asked by many. There are also many traders who do not completely understand the logic and maths behind the way IBD calculates the various ratings. I often see traders mystified by the process or attributing motives to IBD. That is clear sign of lack of understanding of the method behind the ranking. The IBD 100, IBD 200, 85-85, CANSLIM Select, etc are just pure mathematical algorithms which pick stocks which meet certain criteria.

If you have access to earnings data, you can replicate exactly same things. There are several clones of CANSLIM in the market. Some of them have improved upon the IBD ranking methods. If you run a search with CANSLIM, you will see several of them selling a subscription to variation of the same thing. Some use forward earnings to calculate the EPS ranking. Some derive one composite ranking by using a combination of EPS, Relative strength and industry sector ranking. Some have devised different rules for entry based on MACD or ADX, some have pattern based anticipation. Some years ago I studied in microscopic details all of them. Ultimately all of them enter on high volume breakout.

The reason to focus on the IBD 200 is at a broader level it picks stocks based on 3 main criteria EPS momentum, price momentum, and sector momentum. So these are stocks are on the move in the market for that particular time frame. That is where money is flowing.

At any given time, when you look at the list, you will get 4 types of stocks.

Over extended stocks
Stocks which are way extended in terms of their price and earnings cycle and may be risky to enter at this stage. Buying extended stocks is asking for trouble. That is one of the reason the IBD 100 tends to show poor results compared to IBD 200, as it has more extended stocks.

Mid Way through Rally
In these stocks the rallies started some time ago and better entries were available then. Such stocks still offer entries for swing traders.

Basing Stocks
These are stocks which have between 20 to 65 days of basing action, where price growth is below 10 % or so yet price is within 15 to 25% of recent high. These are the kind of stocks which offer the best opportunities. This is the universe to concentrate on.

Reverting Stock
Some of the stocks are in reversal after their rally phase being over.

Now if you can identify these stocks from the list you can improve your results . Lot of frustration for lot of people is due to the fact that they enter a overextended stock and it quickly dives.

The reason to use a list like IBD 200 is to narrow down your trading universe to handful of stocks. The stocks selected should be the one with highest probability of going up. Which is what the IBD 200 list offers in a convenient format for those who do not want to get in to too many details.

For those who understand the logic behind any method, there are better ways to trade or ways to improve on it by looking at a wider selection of stocks from IBD EPS ranking universe. IBD 200 is lazy way to beat the market. You can plan and anticipate entries, you know what sectors are working, you know what the market currently is favoring.

If you do not have access to IBD 200, because you live outside of USA , you can use a similar logic for your country market and look at top 200 to 300 stocks selected based on relative strength alone and you will get similar kind of stocks.

To do that use the following scan and take top 5% stock in it:
0.4 * (C * 100 / C65) + 0.2 * (C65 * 100 / C130) + 0.2 * (C130 * 100 / C195) + 0.2 * (C195 * 100 / C260)

...or since relative values are the only thing that matter, a more simple version:

2 * (C / C65) + (C65 / C130) + (C130 / C195) + (C195 / C260)

The scan mimics IBD relative strength rating. You will also need to filter for liquidity and price by using filter like:
AVGC20 * AVGV20 >= 5000 AND C >= 5

One limitation of this will be you will not get stocks which have traded for less than one year.

Now for those who keep harping on will it work in bear market. Here are couple of exercises:
1 Locate copy of IBD 200 during bear market. Put it in your data software and go through the candidates one by one.
2 Create a scan for top 200 stocks ranked by above formula for 2000, 2201 and 2002 and see what stock it gives you.
3 Study and understand what really happens to stocks with superior earnings during bear market.

And report your findings........

Only self evident truth is truth for most people.

21 comments:

DC said...

For those not familiar with TC2000 code, could you kindly explain this further. Thank you
"...To do that use the following scan and take top 5% stock in it:
0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260)
The scan mimics IBD relative strength rating. You will also need to filter for liquidity and price by using filter like:
AVGC20 * AVGV20 >= 5000 AND C >= 5..."

Pradeep Bonde said...

c= price today
c65= price 65 days ago
c130= price 130 days ago
c195= price 195 days ago
c260-= price 260 days ago

It is basically a weighted average of price growth for one quarter, half year, 3 quarters and a year.

Avgc20= average of last 20 days price
avgv20= average of last 20 days volume
5000= 500000 USD
So it is average dollar cash flow in to stock was above half a million.

santosh shinde said...

I see your posting have created a great interest in newbie like me to learn from your informative postings.

Have you tried the strategies using options spreads? If so can you elaborate more on that? E.g. how many days to expiration to look for the option? Do you use open interest/volume trade? Was there any slippage in profits for price fill during trade?

Pradeep Bonde said...

I am not an option expert.

m said...

Pradeep,

If there is no major catalyst like earnings, which order do you look at for these stocks :
1. Float first
2. 20 - 65 day growth second
3. % from high third
(or diff order)?

Thanks!

Pradeep Bonde said...

1 Virgin/neglect
2 Float
3 20-65 days growth and 1 year growth
4 number of 4% moves in previous 6 months to one year

hottpotato said...

Pradeep
can you explain in detail the code-i see what you already explained but you left out what all the symbol values are and how to enter them ie: where to enter them into the scanner whether it be Tc,Yahoo,or what ever scanner one is using-greatly appreciated
thanks for your time-namaste T

Pradeep Bonde said...

0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260)

Dummies edition of the scan
1 Calculate one quarter % growth . One quarter is 65 trading days.

2 Calculate 2 quarter % growth . One quarter is 65 trading days. Two quarter is 130 days

3 Calculate 3 quarter % growth . One quarter is 65 trading days. Three quarter is 195 days

4 Calculate 4 quarter % growth . One quarter is 65 trading days. Four quarter is 260 days

Allocate 40% weight to 1 and 20% weight each to 2,3,4. Calculate weighted average.
Rank stocks by this. Take top 5% stock

Ensure sufficient liquidity is their for trading. You can do which ever way you want to do it.

This will in US market give you around 200 stocks. These are stocks which have high relative strength. Now find a way to enter on this. Manage your risk.

I don't think you can do this in Yahoo scanner. Or at least I am not aware of how to do it in Yahoo, as I don't use it.

Art said...

Paradeep in your first scan, using TC when I setup an EasyScan on All Stocks, I am wondering - where would you suggest I set the Edit Conditions window-Value bar to be most consistent to your ways as possible?

TIA!
Art

Semsons said...

Pradeep,
thanks for your patience with us, really amazing. I'm 100% convinced I won't make a single buck with your methods, but I'm learning quite a lot in your site.

Pradeep Bonde said...

list rank
take 99 to 95

Susan said...

hotpotato, you can try to do this in Amibroker. I dont use telechart either. want a cheap tools to learn things from first. Download amibroker and get the crack, and play around with it.

Art said...

>> Semsons said...thanks for your patience with us, really amazing. I'm 100% convinced I won't make a single buck with your methods, but I'm learning quite a lot in your site.

You may not Semson, but I have seen more 20% gains in my port since The Lord sent my new teacher to me than I ever have in the past. I thank you Paradeep from the depths of my heart.

Art

hottpotato said...

my sentiments exactly!-thanks PDB for putting up with us-yes i am a dummy at this...but not for long with your help and other kind hearted people-thanks susan for the tip-i will check it out this evening-Namaste-T

volstreet said...

Thanks for a straight forward approach that is easy to understand and makes money. Vol

semsons.group said...

art,
Yes I just wanted to thank Pradeep.

BTW what method are you using?. For me the Double Trouble supposes too much trading. I've to check the others.

Thanks.

kris said...

Pradeep, it was a very good explanation of why you are using the IBD 200 list as a base for scanning the probable candidates for trading.

I am very motivated to try out this method.

Thanks for your great blog.

mauidiver15 said...

Pradeep,
I was wondering if you ever pay attention to zones of resistance when you select stocks.

For example, if you were using the IBD 200 universe and you scanned for stocks up 4% w/ volume each day, could it be better to select stocks that just had a breakout to a new high and thus cleared resistance?

Or, have you found that the "basing stocks" you mentioned that are still within 75-85% of the previous high tend to break through their previous highs and supposed resistance?

I am a new trader and I don't want to give too much emphasis to technical analysis (as you have said it is a jungle). I just wanted to know if the concept of resistance is important to look at in these methods.

Siya said...

Hi, Pradeep,
In market monitor, you color some of the cells. Could you please explain these?

Thanks,
Siya

Pradeep Bonde said...

mauidiver15
When the list is published on Thursday, the stocks are within 15% of their 52 week high.

My studies show up to 25% from recent high is not a problem.

Siya
They indicate highest value for a months data.

Randy said...

I think your calculation of IBD Rel Str is incorrect. Shouldn't it be a weighted average of quarterly ROC? If I understand the TC2000 code, it appears you are doing a weighted average of the 3-month, 6-month, 9-month, and 12-month returns.

For example, I think you want:

0.4 * (C * 100 / C65) + 0.2 * (C65 * 100 / C130) + 0.2 * (C130 * 100 / C195) + 0.2 * (C195 * 100 / C260)

...or since relative values are the only thing that matter, a more simple version:

2 * (C / C65) + (C65 / C130) + (C130 / C195) + (C195 / C260)