Monday, July 25, 2016

Small Lot Trading: A new strategy

Update 8/27/2016: See "Small Lots Trading: Stock Picking".

Update 8/23/2016: See "Small Lots Trading: Lessons so far".

Update 7/26/2016: Revisions, changing the exit strategy to differentiate between winning and losing trades.

In the deep hours of the night, when thought is at its most creative, I fell to thinking about Robin Hood.

Not the green-suited populist thief hiding out in Sherwood Forest with his band of merry people. (We must not overlook Maid Marion, who, it is said, was also quite merry, making the usual "band of merry men" designation most inappropriate.)

No, Robin Hood that came to mind was Robinhood Financial, the smartphone stock trading app that provides commission-free trading from accounts with no minimum funding.

Small lot trading with no fees. As I lay in the dark, I smelled the sweet scent of opportunity.

Way of the Turtle
by Curtis Faith

Commissions have been my reality since I began trading in 1982. They were quite expensive back then -- $40 or $50 with extra added on for odd-lot sales, those that were in increments other than multiples of 100.

The markets and trading have changed dramatically since then. Most brokerages charge $9.99 or thereabouts for any trade. The differing treatment of odd lots has disappeared entirely.

Cheap as commissions are, they still have the power to distort trading decisions.

Long-time readers of Private Trader know that my strategies are all about the odds of success. I pay very little attention to corporate health, the bottom line or the price/earnings ratio. I want better than even odds of making money. Period.

Odds have a curious characteristic. If I flip coin once, I have idea whether it will land heads or tails. If I flip a coin 100 times, its a near certainty that I'll see each side land up half the time.

For the odds to work in trading, then I must place as many trades as I can, knowing that the statistical laws will come into play giving me a knowable chance of winning.

Private traders, like us, we're all normal folk trying to make our way in the world. We're not independently wealthy. You'll find neither a Buffett nor a Soros in our ranks. If we're to place many trades, we need to ensure that each trade is only a small portion of our funds.

And that's where the commissions begin to wield a malevolent influence. If I'm a young Millennial -- let's say a 26 year old who has managed to scrape together $500 -- I need for each trade to be $50 or smaller to have even the slimmest chance of allowing the odds to come into play.

If I complete a $50 trade, it costs me $10 to open the trade and another $10 to close it. I have to earn a 40% profit on the trade in order to break even. That level of profit is a rarity in stock trading. That sort of math make small lots trading -- trading a share or two in each position -- an impossibility.

Robinhood's commission-free trading  changes the equation. With no commission, I can easily have 10 active trades at a time. With proper management, I can raise that number to several thousand different positions in a year. That gives the odds room to work.

The devil, as always, is in the details. I want rules that will give me an edge, so I can have greater than even odds of winning, and that provide for positions held for a small amount of time, so I can increase the number of trades I make each year. I also must use analysis that selects stocks on the move, and that require very little analysis to identify, so I can handle the larger number of trades without cutting into the other things I do during the day.

I intend to give small-lots trading a try, using Zacks Investment Research to identify the stocks I'll trade. There are other ways to pick potential trades, of course. Zacks fits me, but it's a personal choice.

Here are the rules I'll use.

Tactic #1: Earnings plays

During the trading session immediately prior to an earnings announcement,
  1. Select a list of all stocks from Zacks that meet two characteristics: a) They have the highest bull rating Zacks provides (#1) and b) they have a Zacks Earnings Surprise Prediction (ESP) score of greater than zero.
  2. Select the symbols publishing earnings prior to the next trading session by matching the Zacks list against the Yahoo! list of earnings announcements to produce a list of prospects.
  3. Buy all of the prospects.
  4. Sell losing prospects within three days; hold winning prospects while they remain uptrending or until those funds are needed for new trades.
For this week, there are a total of 1,126 U.S. stocks on the Yahoo! earnings list. Nine of them are on the Zacks list and so qualify as prospects. Only one of them, CLGX, is eligible for trading today. My account was funded before the market close, so the trades described below are the real deal.

CLGX is running for $40.38, which would take about 1-1/4 shares to reach my $50 lot. I can't trade fractionals, so I'll round down to a single share. And click, it's done. I'm now the proud owner of one share of CLGX.

Tactic #2: Turtle play

Private Trader used the Turtle trading analysis from early on in its lifespan (the first post was in May 2010). I use it now in between earnings seasons, although it has not been productive of late. 

Turtle trading gives a bullish trading signal when the current price moves above the upper boundary of the 20-day price channel (the highest price reached in the past 20 days). 

I learned early on that the Turtle, like most trading signals, is prone to whipsaws. So I check the proportion of price channel breakouts during the past year that have produced a profit. Only those that are in the top two quintiles -- 60% or greater -- are worth trading.

After each trading day,
  1. Select a list of all stocks from Zacks that have the have bull ratings (#1 and #2) that gave bullish trading signals. 
  2. From that list, select the stocks that have 60% or greater historical odds of a successfull bullish trading signal under the Turtle trading method.
  3. Buy those stocks.
  4. Sell losing prospects within three days; hold winning prospects while they remain uptrending or until those funds are needed for new trades.
There are 840 symbols on the Zacks list. For today's trading, I'll use Friday's list, which had 501 symbols.

There were five bullish trading signals on Friday. Two of them meet my criteria for a history of successful trading signals: CTXS and VTR. CTXS is rated #1 and so qualifies for a trade. VTR is rated #3 and so is discarded.

CTXS is trading at $88.21, which is more than one lot. I have plenty of room in the portfolio before I have exhausted by $50, so I buy a share of CTXS at that price and click, it's part of my portfolio.

Trading ledger:
symsharesentry dateexit dateentry price per shareexit price per shareresult $result %tactic

How to consistently Beat the Market: Zacks Proven Formula for Making 26% a Year for More than Two Decades
by Mitch Zacks

-- Tim Bovee, Portland, Oregon, July 25 , 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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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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