Visual Inspection Reveals High Profit Method
How to See an Easy Pattern
That Increases Gains and Controls 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 member. (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 level of two weeks earlier. It is, and its trend parallels Money Flows' (single-week) trend. This concurrence signals a sell (and/or sell short) on BIDU.
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 (Amazon) reveals four concurrences. Two of them result in losses. The numbers appear 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 |
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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 |
|
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 return 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.
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 quite satisfactory 83% final return, but there were also two consecutive losses leading to a realized loss drawdown of -15% before the final upturn commenced.
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 proved the experiment to be a failure . . . so far.
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 underway. 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 the Money Flows row for stocks with rankings moving in the same direction measured from the current week to the prior week two weeks before. Ignore the intervening week. Buy or sell in the direction of the confirmed parallel trends. Both stocks in the current example are still long because the Money Flow indicator has not yet turned down.
A cursory look a few previous episodes shows that the best positive results seem to occur when the stocks that match the MF trend are on the 'wrong' side of median, that is, they have the most room for their ranks to run. For example, the better buys on this page occur when ranks are below median.
The best buy of all came out of BIDU's near bottom-rank level of 33 on February 6.
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. Simply buy options in the direction of the position you wish to open. Your loss limit becomes absolutely controlled to the precise dollar risk you specify, and it runs until you choose sell the option. The risk is fixed; the reward, if any, is variable only in a beneficial direction with no constraints.
This is not the place for a treatise on the subject, but if you have not considered 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 6:30 p.m. EDT
Posted
5/10/2009 3:25 p.m. EDT
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