Tuesday, January 22, 2013

How does my garden grow

My project this weekend was to add the over-the-counter bulletin board stocks to my analytical universe.

My old universe of exchange-traded stocks and funds was 9,062 issues. The new universe, with the OTC BB added in, is 21,575 issues.

There's something about more than doubling the size of a universe that gives me a sense of awesome powers, like being able to cause storms and super novas with the wave of a hand.

Reality struck this morning as only two of the breakouts identified in my analytical scan panned out as potential trades, and as problematical ones at that. So no super novas or storms this trip. The best I can hope for is a gentle morning dew.

Like any gardener, the stuff growing in my garden is more than I want, or can even deal with. Weeds can always overwhelm the useful beauties, so a good stock trader, like a good gardener, must develop some weeding skills.

My database goes back to the first day of trading in 2009. The analytical runs take a lot of time, so I do my daily runs on a subset of the data: Liquid exchange-traded stocks priced above $15 and trading at least 500,000 shares a day, less liquid stocks on the exchanges priced above $5 and trading fewer than 500,000 shares; and OTC BB stocks priced at a penny or more trading at least 100 shares a day.

The major additional restriction is that all the stocks I'm looking at today are tracked by the analysis company Zacks, ensuring that there will be information available about the companies behind the stocks. Neither Zacks nor anyone else looks at a lot of OTC BB stocks, so the Zacks connection is an especially tight restriction on that data.

After that, I identify the prices that have just moved beyond the 20-day price channel, which further restricts the potential trades.

Altogether, I analyzed 2,441 symbols -- a process that took about three hours to run on my Lenovo ThinkPad W520 portable workstation (a lovely machine) -- with these results:
  • Liquid stocks: 17  breakouts beyond the 20-day price channel. Of those, only four had historical odds above 50%, my criterion for considering a trade. Two were removed from consideration because of looming earnings, and dropped back into the price channel this morning and so failed the confirmation test.
  • Less liquid stocks: 11 breakouts. Six had odds above 50%. Of those, three had earnings announcements pending, and one failed confirmation, leaving two, FNV and CYBX, as possible trades. More on those in a later posting today..
  • OTC BB stocks: Five breakouts, none with success rates above 50%.
The main lesson of the excercise is that my rules weed out a lot of potential trades before I spend any time looking at them in detail. I don't sit down and do the weeding myself, mind you, but the computer programs I've written are quite efficient at applying a set of rules to the thousands of trading prospects that are in the data each day.

Although the purpose of stock analysis is weed out the less interesting prospects, the downside is that weeding can rip up beautiful flowers hiding among the weeds, and the gardener will never know what sort of useful beauties are being tossed out with the yard waste.

Trading rules need to be examined, to ensure that they are selecting prospects with the most useful degree of rigor. And that is a process that I shall continue to push in my own trading in the weeks and months to come in 2013.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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