Tuesday, August 23, 2016

Small Lots Trading: Lessons so far

I began an experiment in late July in trading small lots of shares in companies, a strategy made possible by the business model used by Robinhood Markets,  a brokerage that charges no fees or commissions for each trade. It makes its money by interest on uninvested funds.

I wrote about my view of the opportunities the new trading model presented in Small Lot Trading: A new strategy.

At a typical online brokerage, a round-trip stock trade costs $20. At that price it's not feasible to make trades worth $50 or $100 apiece. A $50 stock position would need to earn a 40% profit just to break even.

That reduces the ability to form a diversified account. It also forces traders to be less sensitive to the movements of the market. At $20 a round trip, I can't skim a very small profit and move on when the short-term trend peaks; I have to trade at a less sensitive level, a longer-term strategy.

I think of it in terms of Elliott wave analysis: Market trends are fractal, uptrends and downtrends within larger level uptrends, and so forth from the tick chart to a monthly chart spanning decades, or even centuries.

Robinhood allows me to trade at a small level. I choose to use the daily chart as the basis of my trades, which for the most part have lasted five days or less.

After some experimenting, this is how I'm approaching the problem now.

Technical Analysis Explained
by Martin Pring

Since I can only do bullish trades on Robinhood, I select stocks that have a bullish bias. This can be determined any number of ways. I take a short-cut by picking only from stocks that are ranked bullish by Zacks Investment Research, which uses a quantitative model based on earnings revisions and surprises. The companies to-ranked stocks -- about 15% of all covered -- have produced a 26% historical return, beating the S&P 500's 10%.

This in theory means I gain a bullish edge just by those picks.

But even stocks with a bullish edge spend a significant amount time in downward correction. So having gained an edge, I need to hone that edge by picking only stocks that are uptrending now.

There are any number of trend and momentum technical indicators that will meet that need.

For one set of trades, I use the trend/momentum indicators solely to pick stocks. I started out using the MACD, switched to a short-term moving average, and have switched to the stochastic relative strength index, a hybrid that applies a stochastic oscilator to the relative strength index.

There are 835 stocks (this week) that qualify as a selection pool using the indicators. I can't analyze them all. To overcome that reality, I do a random selection each day and analyze the symbols until I have a sufficient number of trades for the day, generally five trades.

For stock selection, I also continue to use the Donchian price channel breakout that forms the heart of Turtle trading as a selection method

And I trade right before earnings announcements when the stock has a bullish rating from Zacks and a positive earnings surprise predictor, again from Zacks.

The trend/momentum indicator has the final word no matter which selection method I use. Whatever the stock selection source, if it fails to qualify under the rules of whichever indicator I'm using, then I won't take the trade.

The earnings surprise predictor and price channel breakouts produce few candidates for a trade. The trend and momentum indicators are far more productive.

I've completed 57 trades so far. The average result has been a 0.3% loss over an average of three days per trade.

I don't have enough data yet to do an analysis for each method. I expect, as a working hypothesis, that I'll conclude that I'll conclude that the bullish Zacks rank is the only method I need, and that the price-channel breakouts and the earnings surprises are a waste of effort.

But I could be wrong. Stayed tuned.

By Tim Bovee, Portland, Oregon, Aug. 23, 2016


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 fortrading on a commission-free platform such as Robinhood Financial.

I can be reached via comments on Private Trader posts or by email at datnillc@gmail.com.


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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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