April 5, 2011

What about underwater symbols like AA or BAC?

This is a seemingly simple, but relevant, question. Here, it generated the debate of what should be included in the selection process? We backtest on lists of stocks for which we know the past. From the question, without testing, just by seeing the charts, I can say that AA would be nicely positive while BAC would still be underwater being some 80% below its 6-year high. But then, I realized that in the three spreadsheet tables presented, there were no banks. And this generated another question: why not?

I know now that there was a financial crisis, but in 2005-06 what would have excluded the banks from my watch list. And what about the 200 or so banks that failed during the last two years. The stop-loss would have taken care of those but for the near misses like BAC or C and others, would I have stayed the course? In hindsight, they would have hit the stop loss long before their respective lows. But that does not mean that six years ago, they would not have been on the list.

As I’ve stated before, the stock selection was simply what other members were viewing on the old WL4 website. So the selection does have survivorship bias, as well as an element of randomness. However, this does not mean that I should throw everything or anything at the trading script. That was another area of inquiry that the question raised.

I’m in the implementation phase of the Alpha Power methodology. The method aims to accumulate shares over time, while at the same time, trade over market cycles in an attempt to generate funds to accumulate more shares in the future. This implies that the script is looking for stocks going up long term. I did not even try the script on FAZ, SKF or QID in an attempt to accumulate shares. They represent a contradiction with the purpose of the script to such an extent that long-term they would destroy the portfolio, as in a rising market, their future is zero; and accumulating shares down to zero does not make much sense.

The script you design must adhere to a philosophy and will have some constraints. I do not design universal trading scripts. A one size fits all kind of thing. I do put some emphasis on the stock selection process. It should be the best you can do, according to the orientation of your trading script. It’s the same for anyone wishing to develop a shorting script. I would suggest looking for stocks that are going down, not up, and that have a relatively short future.

I presented the above tables in hope of generating discussions on trading philosophies. One thing for sure, you should try your very best script on the stocks presented and compare the results. I’m just making the point that by following the Alpha Power methodology of trading over an accumulation process, maybe one can get better results than by trading alone; even if at first it is over a selected group of stocks. Looking at the numbers, I remember that stock after stock I was impressed, with some, more impressed than others.

Created on ... April 5, 2011, © Guy R. Fleury. All rights reserved.