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Discussion Strategies for the bear market I was reviewing the stta material as I do on a periodic basis and had a thought I would like to ask about. If I understand correctly--the short criteria are oversold in a 16 AND 32 day time frame. The long criteria by contrast is oversold in a 16 OR 32 day time period. My question is this---in view of the bear market environment we are in (and which I expect to continue for some time) would it make sense to apply the 16 and 32 day criteria to long positions. I realize this would cut down the number but might improve chances for success in view of the basic system drawdowns in three of the last four quarters. If there is an merit to this perhaps you could note the potential longs that meet both criteria and subscribers could use or ignore as they choose. Anyway please let me know if there is any statistical significance to this idea. Another thing I have been doing which
may or may not be of interest to you. Due to the severity of the
bear market I have come up with a short strategy that I have been using
with good success the last several months. Simply stated I short
the basic system long picks on the day the longs are sold. I then
place a buy stop of a dollar to a dollar and a half depending on the
price of the stock. I hold the position and sell half at a 10%
gain and then move stop down and try for more profit.
Now I know this strategy would not work
in a bull market and I suspend the strategy during market bounce periods
like the last few days. I also do not trade the basic system long
picks during market meltdown periods. I don't know if you would
care to do a statistical analysis of this method but I can tell you
it has worked well since the first of this year.
As always I thank you for your superior
product. I use nothing but your list in my trading and do a lot
of day trading off the list as well. I do think the bear market
has had a dramatic effect on the basic system that will continue as
long as the bear continues so I keep trying to adapt to the conditions.
I do not, however, have the knowledge of capabilities to analyze in
a statistical sense so hoping you can give me an idea as to whether
or not these things have merit.
By the way I would suggerst you folks pick up a copy of "Conquer the Crash" by Robert R. Prechter. I hope he is wrong with his analysis but think all should be aware in case it continues to unfold as he predicts.
Comments from
STTA Consulting
An idea about using 16 AND 32 for bullish list has been checked many times. The list becomes very short and the average profit is very small. Yes, it is working better during the bear market but nobody knows where is the bottom. We have recently finished
analysis of playing options (buying put and calls). We used optional
stocks only and this analysis confirms our conclusions.
We use more strong criteria
for bearish stocks for two reasons:
1. Statistical analysis
shows better quarterly returns
2. Shorting stocks is a
dangerous game and better to have smaller but better list
Described sell-short
system worked well just because of the severe bear market. 10 year analysis
shows that bullish stocks continue their rise but with smaller
"speed" and it is worth buying other stocks for short-term
gain. However you are right: if you short old bullish stocks when a bear
market signal appears (the market is short-term overbought) this
system should work.
Modification of the
Basic Trading Strategy Here is what I have been using with
good success. I run a smoothed 5 period RSI on the daily chart
of the stocks selected by the basic system. I do not buy the two
stocks down the most on the day of analysis. Instead I do the
following:
1. I track the stocks until they
meet the criteria based on the 5 period RSI.
2. The RSI must fall below 15.
Ideally in the 8 to 15 range.
3. The 5 period RSI must then
rise above 20.
4. I buy near the close on the
day that the RSI rises above 20.
5. I just pass on the trade if
the 5 period RSI does not get below 20.
Let me illustrate with an example.
AGIL was a basic system pick on 2/20/02
at 9.75 and the 5 period RSI was at 15.84. I do not buy the
stock on that day but instead follow it until the RSI goes above 20.
This happened on 2/22 so I buy near the close with the RSI at
25.80 and the price at $10.01. Two days later the stock opened
at $11.09.
This has prevented buying into stocks that continue to decline after the official buy point of the system. I have avoided some of the really big hits using this method. I am a full time trader and so I
have incorporated some different trade management concepts into
the system. Suffice it to say I sell partial positions as
the stock rises and stay in the trade longer than the two days
of the basic system. I also use an initial stop of no more
than 10% and move the stop up quickly based on intra day charts
and the action of the stock.
I use the daily charts from Real Tick which has the closing RSI available Jim Bennet Comments from STTA Consulting Some questions from our members and Jim Bennet's answers Questions: How he "smoothes" the 5 period
RSI? On the line numbered 2 of his discussion
page write-up, should the first sentence: "The RSI must fall
below 15" read ". . . fall below 20?" How long he is willing to track a
stock waiting for the RSI to go back above 20. If he uses a similar system for short
trades. If so, what does it look like? Answers I use Real Tick and you just check
a box on the menu to smooth the 5 day RSI. I don't know what charting
software he uses but I would think most would have this feature.
The line he refers to is right
as written. I like to see the 5 day RSI fall to at least 15 before
going back above 20. Many of the stocks on the list go much lower
than that. Many get down as low as 2 or 3. This is just
a criteria I use. Some of the stocks I am sure go up without falling
below 20.
I haven't used this on short trades
but it is an idea that could be looked into.
I track the stocks for several days at least. No exact time but if list starts to get to long I take a few of them off tracking list.
Selling short strategy
in 2000 We have received many questions about performance of selling short strategy in 2000 based on the list of potentially bearish stocks. For the period from January 2000 to November 2000 we calculated the average returns of stocks from the bearish list. We start selling short these stocks at the morning of day #1 (the next day after the day of analysis) and close the position at the market closing of day #4 or #5. For the full picture we will present the average returns (negative returns are good for selling short) in cases if we close the short positions at the opening of day #2 (o2), at the closing of day#2 (c2), etc. All stocks from the list have been analyzed. We have also calculated the risk/return ratios. They are negative. The closer the ratios to zero, the better. The returns have been calculated as R(c1)= (P(c1)/P(o1) -1) * 100% R(o2)= (P(o2)/P(o1) -1) * 100% and so on. Have a look at the graphs: One can see that closing position at clo4 is optimal. The risk/return ratio is the best. However, closing positions at clo3 or even at clo3 is also good.
New method of dividing
trading capital Comments
from STTA Consulting
Stock Options and
Trading Strategies Comments
from STTA Consulting What
is bad What
is good Consider our Low Risk-1 Strategy for trading stocks. The average return per trade (without transaction cost) is equal to 4.7%. The average transaction cost (commissions and bid-ask spread) is close to 1.5%. Therefore, this strategy is profitable. For options the transaction cost is much higher. We calculated the average bid-ask spread for 17,000 options and it is equal to BID-ASK SPREAD = 19% St. Dev. = 31.3% (ALL OPTIONS) Options
> $2 Options
> $4 Options
> $6 The options > $2 are usually "in money", i.e. their strike prices are lower than stock prices (for calls). These options have reasonable bead-ask spreads and their prices follow closely to stock prices. It is not true for low priced options which are usually "out of money" and their prices change little for small price change of corresponding stocks. We think that a trader should use "in money" options to follow our stock trading strategies. Our selected stocks have an average price about $20. For $4 options the stock price change of 4.7% produces change of option price about 25% what is much larger than transaction costs if a trader buys significant amount of option contracts to reduce the influence of brokerage commissions. Preliminary
conclusion:
Buying stocks using
LIMIT orders Strategy: A trader buys stocks from the bullish list during day #1 using LIMIT orders. Stocks should be sold at SALE_TIME. N is number of stocks found during the period from January 1996 to March 2000 (1045 trading days) RR is the risk to return ratio LIMIT
SALE_TIME RETURN
RR N 10% CLO1 0.51% 18.2 1521 10% OPE2 1.39% 7.5 1521 10% CLO2 2.39% 5.3 1521 10% OPE3 4.13% 3.4 1521 10% CLO3 4.04% 3.7 1521 10% OPE4 4.95% 3.15 1521 ========================================= 8% OPE4 4.17 3.44 2396 10% OPE4 4.95 3.15 1521 12% OPE4 5.63 2.94 1002 14% OPE4 5.5 3.27 667 ================================= For this period: RR (one trade) for the Basic Trading Strategy = 3.2 RETURN = 3.48% N = 2090 RR (one trade) for the LOW RISK-1 Trading Strategy = 2.6 RETURN = 4.76% N = 1066 Conclusion: The strategy ( buying with LIMIT = 10 - 12% during day #1 and selling at OPE4) is very profitable but it is more risky than our main strategies.
Price drop during
the day of the analysis We have performed calculations of the returns for the stocks selected for the Basic Trading Strategy as a function of price drops during the day of the analysis. Let us show the plot of returns versus price drops:
Statistics for the period from October 1995 to March 2000. One can see the positive effect: the larger price drop during the day of the analysis, the larger the average return per trade.
New Idea about BPTS Our
users asked us to publish the full SORTED list of stocks (not only two
stocks) for Busy People Trading Strategy. Some people want to have a
possibility to watch three or more stocks (not only two) with maximal
price drops during the last trading day. It increases the probability
of buying stocks and can increase the quarterly returns.
Low Risk Trading Strategy I would like to employ the low risk strategy-1 but cannot watch the market at 4 pm. Could you evaluate the strategy when one selects stocks picked for the low risk strategy-1 during DAY-1 and place LIMIT=100% on the next trading day. What are the average returns, risk to return ratio and probability of buying stocks in this case? Also, if possible to evaluate how would this strategy fare during those mini bear markets? Is it any better or worse than BPTS? Alternatively, can one utilize the idea of the low risk strategy-1 but buy stocks at 1-2 pm rather than at the market close?
Comments from STTA Consulting This idea can not bring a good return. The probability of overnight positive moves for stocks with CLO1 < 0.95*CLO0 (Low Risk Strategy-1) is very high and a trader will miss these moves. Look at statistics (1996 - 2000): Probability to find such stocks = 38% Pure Average Return per trade = 2.5% Risk to Return Ratio = 3.65 Probability of positive return = 62% These characteristics are worse than the characteristics of the Low Risk Strategy-1 and the Busy People Trading Strategy.
Extra Money If the BPTS is confined to buying only in the case of a 95% (or less) cost relative to the Day 0 analysis, why do you say that money is divided into 3 parts and will be used to buy stocks every day? What if neither stock meets the 95% condition, which, as you point out, is a common occurrance in the low-risk strategies?
Comments from STTA Consulting A trader can divide the capital into 2 parts if the probability of finding stocks is substantially less than 100%. This is often the case for the Low Risk Strategies and the BPTS. The quartely returns can be much larger. However, we would never do that because the risk to lose a large portion of the trading capital in one trade is very high. It can kill your courage to trade further.
Stock Selection I am extremely enthusiastic about the system
(especially the Low Risk-1) system, and its reward and risk characteristics.
I think that this may be an important additional
criteria for stock selection, and can increase the average return and
probability of success. Comments from STTA Consulting This method of trading is very reasonable. It is more save. The average return can be less (because the number of trades is less) but the risk can be smaller. The problem is: 90% of our selected stocks have bad fundamentals. Our trading methods are based on the reverse market reaction. We have studied the price-volume patterns but we did not find any significant correlation between increasing volume for oversold stocks and the probability of growth.
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