Saturday, January 4, 2014

Changes in my analytical methods

I'll be making some changes in my analytical methods, beginning with Monday's list of potential trades.

First, I've expanded my analytical universe to include small cap stocks of $1 million or more in market capitalization. I'll do a separate analysis of these symbols, much as I have previously separated over-the-counter stocks from the mid- and large-cap symbols traded on the major exchanges.

For the coming week, that increases my universe from 2,162 symbols to 3,150 symbols.

Second, I'm returning to an earlier two-step method of analyzing odds and yields in the first round of screening.

Some months back I switched to using a score that combined the historical odds of a successful bull or bear signal with the average yield produced by such signals. The resulting score gives equal weight to each of its components.

Both the odds and the yield are measures of momentum. The odds show the reliability of the momentum, and the yield shows its magnitude.

Having worked with the score for awhile, I've concluded that as a trader, I do best by giving greater importance to the reliability -- the odds. Reliability, after all, is the degree to which a symbol's momentum is proof against whipsaws, the nasty tendency of symbols to send a bull or bear signal and then to reverse course, sending profits down the drain.

From Monday, I shall first screen for symbols having a greater than 50% chance of profit, and then I'll sort the results by the average yield in descending order, the greatest yield first. I'll do this separately for each of my symbol lists: mid-cap and larger on the major exchanges, small cap on the major exchanges, and over the counter.

Third, I intend to take a more incremental approach to my second-round screening. Up to now, I've taken the survivors and analyzed them all, doing a spot check of their charts, ratings and returns to see which I wanted to select for the detailed third-round analysis.

The result often is that I gave outsized weight to the easy things to check -- the ranking, returns, options liquidity.

That puts the second round contrary to my emphasis on the chart in the third round. I generally don't get to the rankings, returns and liquidity until deep into the analysis.

Going forward, I intend to take each of my lists, sorted by descending yield, and run through them in a more incremental fashion, looking at the charts first.

For example, I'll take the first three symbols from the mid-cap and larger list and see which chart I like the best. I'll then look at the other elements of the symbol -- rankings, returns, liquidity. If it passes all of my tests, I'll do the third-round analysis to see if its a potential trade. If it fails, then I'll take the next three and repeat.

The danger here is that there far more symbols whose options are too illiquid to meet my standards than there are symbols with sufficient options liquidity.

If the third-round survivors over time are skewing my holdings to much in the direction of shares rather than options, then I'll add a priority second-round analysis on stocks with liquid options only.


My shorter-term trading rules can be read 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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