If I wanted to become a tramp, I would seek information and advice from the most successful tramp I could find. If I wanted to become a failure, I would seek advice from men who had never succeeded. If I wanted to succeed in all things, I would look around me for those who are succeeding and do as they have done - Joseph Marshall Wade
In a previous post, I mentioned how I had not yet quantified the benefit of picking lower priced stocks over those with a higher price. This post will address this issue.
From this week's candidates, after excluding 3 with my eye-ball filters, I have 16 left to choose from. From those 16, my capital would only be sufficient for 9 or 10. I had initially planned to trade the way TradeSim does by default (for single portfolio simulations), which is alphabetically. Then I thought it would be nice if I could test what benefit, if any, there is, by picking lower priced stocks.
In theory it makes sense that, say, a $3 stock, would get to $6 much quicker than you can see CSL (currently around $107) reach $220. But, being the trader I have now become, I don't go for hunches or opinions anymore, everything needs to be tested, validated, and quantified.
Using TradeSim, you can test this by using the SetVariableTradeRank function (see manual pg.115). I told TradeSim to rank the trades in the trade database by their closing prices. And then to give preference to lower priced securities. What I wanted to see is WHERE the results fell relative to the average profit values generated by the monte carlo analysis of the same system over the same timeframe.
So I ran 50 single simulations, and the results were conclusive. Of the annual returns from these single simulations, 49 (98%) were greater than the average return of the monte carlo. Also, 19 of the simulations (38%), gave returns that were significantly higher than the average return. Significantly higher was defined as an increase of more than 5%p.a. in annualised returns.
The above simulations were done on the 6-year period from 01-01-1998 until 31-12-2003. I also did some tests on the previously out-of-sample period which was used for the walk forward analysis. From 50 simulations using the ranking function to give preference to lower priced securities, 39 (78%) produced annual returns greater than the average from monte carlo analysis, and 23 (46%) produced gains that were significantly higher than the average return.
So clearly, there is a benefit in choosing lower priced securities, and the bang for buck theory has been verified and quantified for my system.
Now I have a very easy method of choosing stocks. Go for the lower priced share. Though I should clarify that rightly or wrongly I will still do my eyeball filters first! I just can't buy a share with a disgusting chart!
Next week's purchases will be, in order of preference, LRF, REX, SSX, STS, MIN, CSM, COA, PWK, IWL, BKN.
BKN may have to miss out. I'll see how I go with the position sizing. It looks to be either 9 or 10.
**EDIT: It has been brought to my attention that SSX has in fact been delisted (has merged with OneSteel). So the question must be asked, why was it still picked up by the scan? Because the last time it did trade, it did give a valid entry signal. The most recent data loaded for this stock was 3rd August 2007. So, i must keep in mind for the future to check the date the stock last traded. So BKN will be surely included now. Next in line would be JBH.**
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3 comments:
Nizar,
Looking good!
I would suspect that the lower price stocks are the ones that you can buy the least of, depending on your position sizing strategy, turnover and the trader's capital.
There are other options that you could look at as well, such as share price growth and turnover. Ranking by 6 month price growth, or rate of change, is worth a look. Other indicators could also be worth exploring.
Personally I look at turnover, fundamentals (especially recent announcements), and the chart. I tend to avoid top 50 stocks, although it's not a hard and fast rule. If there are no recent announcements and the price and volume are moving an announcement might be in the wings....
stevo
Hi Stevo,
Thanks for dropping by!
Some interesting ideas there with the ranking. I already include a ROC filter and a liquidity filter in my entry trigger. Though I may give ROC a go for the ranking as well.
Iv just bought Leon Wilson's book (breakthrough trading) and he's got some interesting codes there that may well be worth playing around with.
I look at the chart as well, its hard to buy a stock when the chart looks disgusting!
If you don't mind me asking, Why do you avoid top50 stocks?
And something else I've been meaning to ask you. I've seen you say somewhere that you trade 4 systems? I'm curious to know why you wouldn't just put your capital in the one best system.
Nizar.
Nizar
Why do I avoid the top 50 stocks? It's not a hard and fast rule and really the logic is nothing more than what are the chances of CBA's or BHP's price doubling in the next 6 months? So if I have a signal on BHP and one on YML or OMH I would lean towards the smaller caps.
I also like to mix it up a little. It would be easy to be heavily wieghted to resources at the moment.
Why trade 4 systems? A question I often ask myself! I guess because I am always testing and building systems. I am only taking buys with 2 systems at the moment - 4 was a little overboard.
Also what is "best"? Is it just profits, or maybe a system trades less, or has less drawdown? I want a system for the future that can handle lots of money, has little drawdown, makes good money and is minimal work. I am still searching for the ideal system - if such a beast exists.
If it was easier I would probably be looking at other markets and design systems for them, but I don't really want 2 brokers (or the extra costs my broker would charge) and all the paperwork and record keeping involved in multiple markets. So I stick to the ASX.
stevo
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