Visual Inspection Reveals High Profit Method
How to See an Easy Pattern
To Increase Gains and Control Risk
100 Stocks--3 Portfolios /
Internet Set
Hypothetical--Weekly
7.8 months July 25, 2008--May 1, 2009
See Comments below
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The chart is so easy
it doesn't even include numbers. You won't need them to learn its lesson.
Many patterns exist here. They express the relationships between price behavior and indicators. The indicators occupy the lower portion of the chart.
The general impression you should have is that the indicators and prices (at the top of the chart) roughly trend together. So far so good, but hardly good enough to give precise buy/sell signals.
Try this. We will look first at BIDU (Baidu). What we seek is concurrence of BIDU's trend-direction of rank with the trend direction of the Money Flow of the entire Internet Set Portfolio, of which BIDU is a component part. (The legend to the right of the chart defines each of the curves.)
The first concurrence of the portfolio Money Flow with BIDU's rank progress occurs on August 29, 2008. Actually, the rank level for the week is flat. We want greater assurance that the rank trend shows clear direction without possibility of doubt. Therefore we impose a two-week condition. We ask that the current week's rank be down from the rank lever of two week's ago. It is and its trend parallels Money Flows (single-week) trend. A sell (and/or sell short) signal.
The next concurrence occurs on February 6, 2009. Rank is up above its rank of two weeks prior, and Money Flow has just turned up. A buy (and/or cover short and go long) signal is in place--the opposite of the sell behavior described in the previous paragraph. The buy signal remains in place undisturbed through the end of the chart. There are no losses so far.
The numerical results of these trades appear in the table below.
Tracking similar paths for AMZN reveals four concurrences. Two of them result in losses. The numbers are in the following table. Note: The table includes short selling--which is recommended--more on this below.
TABLE--RESULTS
Buying & Selling Using Ranks & Money Flow
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cumul |
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BIDU |
price |
%prof |
%prof |
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8/29/2008 |
sell |
313.72 |
60.3 |
60.3 |
|
2/6/2009 |
buy |
124.61 |
89.1 |
203.1 |
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5/1/2009 |
|
235.61 |
open |
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AMZN |
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9/5/2008 |
sell |
79.19 |
37.9 |
37.9 |
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11/7/2008 |
buy |
49.21 |
-23.0 |
6.1 |
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11/21/2008 |
sell |
37.87 |
-27.4 |
-23.0 |
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12/5/2008 |
buy |
48.26 |
63.6 |
26.0 |
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5/1/2009 |
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78.96 |
open |
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During the same period, the DJ30 were -27%, NDX100 -24%, SP500 -30%, and HHH -20%.
AMZN's results are not bad,+26% over 7.8 months is 42.5% per year annualized. BIDU's are extraordinary, 422% per year annualized with no losing trades. BIDU's giant is a function of volatility and public perception. It is the ideal kind of stock for buying and selling during years of large, up-down, trading markets. (Table of volatility scores for all stocks in the portfolio available on request here.)
Why did I pick these two stocks? It was a semi-random process. I wanted a period that would show both an up and down market. This period does that perfectly. Secondly, I wanted a simple, verifiable correlation between timing indicators and stock price moves.
I looked for parallel turning points between each stock's ranking and parent portfolio's average Money Flow. Simultaneous flexion points would indicate a change in trend direction of the stock confirmed by the change in direction of the portfolio.
I found four turns in BIDU instead of the two shown in table. There was a lovely 83% final return, but with two consecutive losses leading a realized loss drawdown of -15% before the final upturn commenced.I
There were six turns in AMZN instead of the four in the table. Total return for the whole period was a measly +8.2% and three realized losses. The relatively poor performance of AMZN made the experiment unacceptable as far as I was concerned.
Next I required a stock's ranking to be higher or lower than it was two weeks before. That would increase the probably of a genuine trend change in being underway. That was successful and worth reporting, I felt. You see the results in the table above
How to use this method. Scan the Money Flow row in the small middle section of the weekly portfolio table. Watch for a change in direction. When the change occurs, scan the column above for stocks with rankings in the same direction measured from the current week to the prior week two weeks back. Buy or sell in the direction of the confirmed muiual trends. Both stocks in the current example are still long because the Money Flow indicator has not yet turned down.
Note. Short selling. Something many people are not interested in or would not do by choice. That's fine. You can achieve prudent, satisfactory results without it. But today's study shows the tremendous potential profit advantage in being in the market in both directions, including selling short.
Short selling and Risk. There is no more risk in short selling than in buying long . . . provided you apply system buying/covering rules set forth on this website. Nevertheless, there is a way to further reduce real risk to a specific quantity that you are willing to tolerate. And that is by buying options in the direction of the position you wish to inaugurate. Your risk becomes absolutely controlled to the precises dollar limit you put on it, and it runs until you choose sell the option. Risk is fixed, reward is variable only in a positive direction with no constraints.
This is not the place for a treatise on the subject, but if you have not condsidered it, I recommend you do so under the guidance of an options professional. The problem with professionals is (myself included) they tend to get complicated. Do not let this happen to you. What I am recommending is the utmost plain vanilla. You buy an option instead of the stock, 'in the money', with seven or more months to expiration date. That's all. Sell it when the system says sell.
Caveat. Without comprehensive back testing and validation, this Tips method is highly conditional until you or I prove it otherwise. But it holds promise enough to put on my projects task list
Written
5/8/2009 6:5 p.m. EDT
Posted
5/10/2009 1: p.m. EDT
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