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.
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.
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.