How to beat the market for $1.25 per week- Part3
Besides the comments on the previous post, there are couple of people with whom I have been exchanging emails so I thought I will summarise some of the things discussed in emails, which might help others.
How much can I make:
Answer to this is very clear. It depends on your risk management. If you risk higher proportion of equity on single trade than what I suggested(1% of equity at risk), you may get higher returns but chances are also that you can blowup. The stocks in this list have high beta, so they move in either direction very fast.
There are some ways to significantly improve your returns, all of them involve either pyramiding or phased exits. One method which I employ often is to take a higher position and flip portion of it for immediate 10 to 20% gain. So for example if I risk 2% instead of 1% on some position and buy 4000 shares then I will flip the 2000 for 10% and next 1000 for next 10% and hold rest of the 1000 for longer move. But all these are only for very experienced traders and when the market conditions are right.
To answer it another way, out of around 1600 stocks which appeared in this list over last 1 year 112 made 300% plus move before reversing, 487 made 100% plus move before reversing,1064 made 40% move before reversing.
Can I day trade this list:
Yes, as long as you have a sound working methodology. Even though day trading is extremely popular, in terms of complexity and skills involved it is much difficult than long term trading. That is one of the reason failure rate is so high in high frequency trading.If you intent to use the list for day trading an anticipatory entry will give you much better results. One of the ways to do it is to rank stocks in the list by ratio of todays volume by 50 day average volume (v/avgv50) and select the 10 stocks with lowest volume ratio to watch for next day entry. There are many other ways I can think of day trading it, but that is not my area of expertise.
You will get best result from this list for swing trades or for holding periods of 3 months plus .
What if I follow top 200 stocks daily:
This is for those who do not want to follow the weekly cycle and want to track the list daily, the logic being to get on to some of the stocks before it appears on the list. The assumption here is you have access to daily Investors Business Daily. The simplest way to do this is by every day looking at stocks with composite rating of 96 plus. The IBD 200 contains the top 4% of the stock ranked by IBD SmartSelect Composite Rating. This will still not get you in to stock below 10 as IBD stock tables are only for stock priced 10 and above.If you have Daily Graph subscription you can get this list daily easily, but it costs 1200 for a year.
What about shorting:
You may want to look at the IBD's Bottom 200 Composite Stocks list for this. It appears in the same Thursday paper.
What about stocks which are not on IBD 200:
The stocks in IBD 200 are not the only one which rally. Sometime stocks with no earnings make major moves, so by focusing on this list alone will I not be missing out on those opportunities. Valid concern, but majority of stocks making major moves in the long run have earning as the single most important catalyst.
If you want to ensure that you do not miss out on other stocks rallying besides this list, see my previous discussion about trading momentum and my Waste of My MBA (WOMBA) method.
All methods have limitations. The idea behind the IBD 200 methods is to use a very simple focused approach to stock selection and significantly outperform the market. It is based on statistically proven anomalies(earning effect, momentum effect, sector effect). If you can not make money from the leading stocks and from proven anomalies, you are not likely to make money in the overall market.
Earlier posts in this series:
How to beat the market for $1.25 per week- Part2
How to beat the market for $1.25 per week
How much can I make:
Answer to this is very clear. It depends on your risk management. If you risk higher proportion of equity on single trade than what I suggested(1% of equity at risk), you may get higher returns but chances are also that you can blowup. The stocks in this list have high beta, so they move in either direction very fast.
There are some ways to significantly improve your returns, all of them involve either pyramiding or phased exits. One method which I employ often is to take a higher position and flip portion of it for immediate 10 to 20% gain. So for example if I risk 2% instead of 1% on some position and buy 4000 shares then I will flip the 2000 for 10% and next 1000 for next 10% and hold rest of the 1000 for longer move. But all these are only for very experienced traders and when the market conditions are right.
To answer it another way, out of around 1600 stocks which appeared in this list over last 1 year 112 made 300% plus move before reversing, 487 made 100% plus move before reversing,1064 made 40% move before reversing.
Can I day trade this list:
Yes, as long as you have a sound working methodology. Even though day trading is extremely popular, in terms of complexity and skills involved it is much difficult than long term trading. That is one of the reason failure rate is so high in high frequency trading.If you intent to use the list for day trading an anticipatory entry will give you much better results. One of the ways to do it is to rank stocks in the list by ratio of todays volume by 50 day average volume (v/avgv50) and select the 10 stocks with lowest volume ratio to watch for next day entry. There are many other ways I can think of day trading it, but that is not my area of expertise.
You will get best result from this list for swing trades or for holding periods of 3 months plus .
What if I follow top 200 stocks daily:
This is for those who do not want to follow the weekly cycle and want to track the list daily, the logic being to get on to some of the stocks before it appears on the list. The assumption here is you have access to daily Investors Business Daily. The simplest way to do this is by every day looking at stocks with composite rating of 96 plus. The IBD 200 contains the top 4% of the stock ranked by IBD SmartSelect Composite Rating. This will still not get you in to stock below 10 as IBD stock tables are only for stock priced 10 and above.If you have Daily Graph subscription you can get this list daily easily, but it costs 1200 for a year.
What about shorting:
You may want to look at the IBD's Bottom 200 Composite Stocks list for this. It appears in the same Thursday paper.
What about stocks which are not on IBD 200:
The stocks in IBD 200 are not the only one which rally. Sometime stocks with no earnings make major moves, so by focusing on this list alone will I not be missing out on those opportunities. Valid concern, but majority of stocks making major moves in the long run have earning as the single most important catalyst.
If you want to ensure that you do not miss out on other stocks rallying besides this list, see my previous discussion about trading momentum and my Waste of My MBA (WOMBA) method.
All methods have limitations. The idea behind the IBD 200 methods is to use a very simple focused approach to stock selection and significantly outperform the market. It is based on statistically proven anomalies(earning effect, momentum effect, sector effect). If you can not make money from the leading stocks and from proven anomalies, you are not likely to make money in the overall market.
Earlier posts in this series:
How to beat the market for $1.25 per week- Part2
How to beat the market for $1.25 per week
Posts
11 comments:
What if you use IBD e-tables? Does it let you find stocks below $10 that have the 96+ CR? Thanks!
I have not used IBD e-tables, so no idea.
Pradeep,
Thank you for all of the information provided in your posts.
I have a couple of questions concerning one of the parameters in the IBD 200 strategy:
What is the initial stock price increase to use? 2% or 4%? Assuming its 2%, is it greater than or equal to 2% or around 2% (i.e., does a breakout of 7% qualify for this parameter or should the breakout be limited to 2-3%)?
Thank you for your patience.
Mike
It has to be above 2% and volume should be higher than previous day.
IBD Friday issue has weekly review that lists about 120 graphs and 190 stocks from IBD 85-85 index. Why would you think Thursday's IBD 200 was a better choice(no surprise if those 2 lists have large overlap)
The two lists are derived using different logic. There is overlap but the IBD 200 does better job because it takes in to consideration stocks and sectors which are in favor.
If you study how the two lists are derived, you will understand that. My 2 years of testing shows IBD 200 outperforms 85-85 list.
85 -85 is list of stock likely to breakout, while IBD 200 picks stocks currently rallying and whose sector is in favor. IBD 200 also includes stocks with lower EPS , 65 EPS stock will make it to IBD 200 as long as its sector is in favor and the stock has higher relative strength. IBD 200 includes stock priced from 5 and above. Many stocks breakout and offer best entries before 15. While 85-85 list only includes 15 plus stocks. The biggest difference is IBD 200 weighs sector and individual stocks relative strength more than EPS in composite calculation.
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According to IBD itself:
If you use only one of the IBD SmartSelect® Ratings, the Composite is your choice. It combines the rating for Earnings Per Share, Relative Price Strength, Accumulation/Distribution, Industry Group Strength and Sales+Profit Margins+ROE.
IBD 200 is based basically top 4% stock by composite rating.
Do you have any criteria for volume when you pick candidate from IBD200?
Lots of stocks in both IBD200 and 85-85 index list are thinly traded(vol < 500K). Do you also look at percentage of volume vs floating shares?
I look for volume above 100k and float below 25 million.
Pradeep:
I posted last week and thanks for your prompt reply. Great job on this stuff. I am backtesting based on my collection of Monday IBD's...largely from this fall. My results for about 70 data points are okay, but not staggering (2.5% over an average 45 day hold time...about 22% annually, but I think my standard deviation is too high for me to feel totally comfortable...also, I am using a 3% price breakout for entry).
You mentioned pyramiding, but only for experienced people. What could a rookie like myself use for exits? I have been using a 10/40 MA crossover, but I think I could do better. I normally flip flop between moving average crossover.
This was used with a two "average true range" initial stop.
Additionally, once I tried exiting after 5 days if the stock was below it's breakout, my results seemed to suffer.
I won't bore you with any more details unless you ask. Thanks!
If you use the method primarily to swing trade on 3 to 10 days time frame with profit target, your returns will improve. There are more tricks to improve success like using additional criteria to select only high probability setup.
For exits MA is very inefficient way to do it. One needs multiple strategies to exit. Most of my exits are based on time stops and partial profit exits. So when I enter a trade I have a time stop in terms of if the trade does not start working in 3 to 5 days (depending on initial breakout day % change)then I get out. I exit at certain profit points like 10%, 15% , 20% and so on. Besides that there are rules like if a stock goes up certain % after entry day then I exit. So all in all there are many more variables added to the simple method to improve the result. It is not a 100% mechanical strategy. I use 105 discretion and 90% system.
Been going back over some of this stuff and wondering if subscribing to eIBD is worth the investment. I use Incredible Charts and wondered if anyone had programmed Pradeeps scan?
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