Saturday, August 27, 2016

Small Lots Strategy: Stock Picking

See "Small Lots Trading: A new strategy",  for a full explanation of the trading strategy.

My small-lots strategy, an experiment in leveraging the capability of doing short-term trades in small numbers of shares provided by no-fee brokerages such as Robinhood Markets, relies on selection of stocks that will go up for awhile, on exiting winning trades before they become losers, and exiting losing trades before they lose a lot

There is nothing more to it.

For such short-term trading the only tool available to me, as a private trader, is technical analysis, a plethora of techniques named through analogy (candlestick patterns), ego (Bollinger bands) and scientific-image (stochastic), or drawn from a bowl of alphabet soup (MACD, RSI).

The dirty little not-so-secret secret of technical analysis is that it often doesn't perform as promised. When I first started Private Trader six years ago, in May 2010, I spent years experimenting with technical analysis, and found all techniques to be wanting. In all cases, the proportion of false signals was so high that it made the technical analysis meaningless.

And indeed, a Google search of the phrase "technical analysis doesn't work" (in quotes in the search to require the exact phrase) called up about 1,340 results (or 2.4 million results without the quotes).

And yet here I am again, with my small lots experiment, using technical analysis, in the form of a tool called the Stochastic-RSI -- a portmanteau indicator that applies technical analysis to an analytical tool called the relative strength index.

Madness: Doing something time and time again in the expectation that it will produce a different result.

Trading for me ultimately is all about seeking an edge, something that will twist the odds in my favor. My present foray into technical analysis uses these characteristics to gain that edge:

1) The stock must be rated bullish (rank 1 or 2) by Zacks Investment Research.

2) The Stochastic-RSI must be in oversold territory, which I define as below 24.

3) The stock price on a daily chart spanning one year must be in an visually recognizable uptrend. (The human brain, one of the best pattern recognition systems on Earth, knows an uptrend when it sees it. I just look at the chart, longer term first and then last week, and trust my instincts.)

4) The Stochastic-RSI must be rising.

I've added the chart trend requirement to the mix (#3 in the list) for next week's trading. I use #1 and #2 to pick my selection of prospects before trading day. I'll make a final decision based on #3 and #4 on trading day.

Will it work?

Traders by definition are optimists, sometimes when optimism is a form of madness (see the definition of madness above).

When I was a school child I wrote a short story about a madman that ended, "I'm not crazy. I'm not crazy. I'm not crazy." If I can make technical analysis work in this experiment, then I shall have proven, to myself at least, that technical traders are at least as sane as everyone else in the markets.

Good trading, everyone!

By Tim Bovee, Portland, Oregon, Aug. 27, 2016

Technical Analysis Explained
by Martin Pring


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

Small Lots: A new strategy discusses the thinking behind the analysis that identified these trades and can be read here. The symbols noted in this post are intended for trading on a commission-free platform such as Robinhood Financial. See my initial post on the strategy here.

I can be reached via comments on Private Trader posts or by email at


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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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