Tuesday, November 22, 2016

Small Lots Approach: Analysis 7/2016 through 10/2016

With 158 completed trades under my belt from July 25, 2016 through October 2016, I think there's enough data to begin to draw some conclusions about how successful the small lots approach has been.

The approach was an experiment, something I had been unable to try before because trades carried fees, setting practical limits on the size of a trade and the length of time it must be held.

The idea behind the small lots approach is to use a no-fee brokerage, Robinhood Markets in my case, for quick trading of shares, thereby increasing diversification and gaining and entry into small- and mid-caps trading that is denied me by my options strategies. Robinshood allows only bull plays -- there is no provision for short sales.

I rely in part on the stock analysis company Zacks Investment Research in choosing what to trade.

I described the approach in a July 25 post, Small Lot Trading: A New Strategy.

I initially began with a trend tactic, simply looking for breakouts on the chart. I then abandoned that approach, moving to a diversified approach using these tactics:
  • Channel. The classic Turtle Trading method, using a 20-day price channel breakout. The original Turtle Trading rules may be read here as a pdf file.
  • Earns. Positions entered the day before an earnings announcement.
  • Stochastic Relative Strength Index. The Stochastic RSI comes in two flavors, breakouts or upward trends near the 20% line and near the 80% line. They are abbreviated in the spreadsheets as rsi-20 and rsi-80.
  • Dividend. A so far little-used dividend flipping strategy, where I entered a position a month before the dividend and then exit once the price has returned to the entry level or higher.
For the Channel tactic, I require that more than half of channel breakouts over the past year to have been profitable. This weeds out the dreaded whipsaws.

For the Earns, Stochastic RSI and Dividend tactics, I require a bullish rank (1 or 2) from Zacks and in addition a beta of 1.5 or more, or -1.5 or less. The beta requirement suggests that the stock will move sufficiently to make the trade worthwhile.

For the Earns tactic, I also require that Zacks Earnings Surprise Prediction be positive. 

For the Stochastic RSI tactics, I require that the price be within a six point range and uptrending on the one-month chart. For the rsi-20, the range is 18% to 24%. For the rsi-80, the range is 76% to 82%.

And now, the results, with all yields in percentages.

Rise of the Robots: Technology and the Threat of a Jobless Future
by Martin Ford

Results, 7/2016 to 10/2016
tradestotal yieldyield/trade
Results by tactic, 7/2016 to 10/2016
tactictradestotal yieldyield/trade
Results by month, 7/2016 to 10/2016
yearmonthtradestotal yieldyield/trades&p 500
Results by month and tactic, 7/2016 to 10/2016
tacticyearmonthtradestotal yieldyield/trade

And the results are not profitable overall except for the RSI-80 tactic. (I'm discarding the Dividends tactic as having insufficient evidence.) However, the RSI-80 also has been used for only one month, which may not be sufficient to provide a good assessment.

Another analysis to be done would be of the central tendency, discarding outliers and focussing on what's left. I shall do that analysis for all months once the November results are in.

Several things strike me at first glance.
  • The S&P 500 was down most of those months. Since the trades were all bull trades, I can infer that the trades followed the market.
  • Anecdotally, as I recall not a single trade had a negative beta, reinforcing the market-following theory.
  • The RSI-80 tactic, which showed a positive yield, tracks a trend in progress. The Channel approach ought to do the same. The RSI-20, on the other hand, is more of a trend anticipating tactic, an attempt at market timing.
I won't modify my method until the November trades have been analyzed, will suspend small lots trading during December and will implement changes in time for the January kickoff.

Here's my thinking now.
  • The RSI-20 and Earns tactics ought to be discarded. (Corollary: The Zacks Earnings Surprise Predictor isn't something I should rely on.)
  • The Channel tactic is hitting the trend too late in its cycle and so should be modified or discarded.
  • The RSI-80 can be retained but must be tested by lowering the reference line to, perhaps, 60%, to be in the ongoing trend but to catch more of the rise.
  • Another trend following approach, such as a moving average, might also be profitably attempted.
  • I cannot yet say whether the Dividend tactic is useful and should continue to experiment with it, although I need a rule for exit when a trade remains unprofitable rather than rebounding.
  • And of course, there's the Doomsday scenario: Scrap the small lots approach entirely and focus my efforts entirely on large-cap options trades.
Way back in 2011 I posted an essay titled Technical Analysis Doesn't Work. In it, I wrote:
I’ve finally concluded that the tools of technical analysis work just fine, except when they don’t. And when they stop working, it will be without advance notice, without a hint that something is about to go awry, and it will cost the trader money.
It was the culmination of a growing disillusion with the conventional wisdom of trading.

Having returned, at least partially, to such tools in my small lots experiment,  I cannot say that my disillusion has lessened.

By Tim Bovee, Portland, Oregon, Nov. 22, 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 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 datnillc@gmail.com.


Two social media feeds provide notification whenever something new is posted.
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.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

No comments:

Post a Comment