simple volume & relative strength system -in the development stage.

[bbmac]

Hi,

I'm currently cobbling togethor a simple trading system, based on a number of ideas picked up in various places on the web, this and other discussion boards included. I believe it has some potential with the right level of strict money management. Any ideas are appreciated, and I will incorporate them into the testing of it, and publish to this board accordingly.

The principle is simple:

Essentially a day trading system:

1. At EOD make a list of the strongest and weakest stocks traded that day on any exchange of your choice, for this example lets go with all the FTSE100 stocks. I'm thinking that list should be based on the previous day's volume traded, and relative strength. [Any further ideas on determining the strongest and weakest, and opinions on most exact way to calculate relative strength?]

Let's say the list should compose of the 5 strongest and 5 weakest. (Maybe also incorporate a filter of whether the day's hi/lo were higher/lower than the previous day, to further identify short term trend. (I did say it was simple!)


Based on the above:

2. 'Buy' the 'Strong' stocks that open down, and 'Sell' the 'Weak' stocks that open up.

3. Sensible Exit points - all suggestions gratefully received, with the proviso of minimising losses ie: against a tight stop. Where to exit to take a profit? (the first reversal?)

Spread betting as an instrument or the purchase of the stock seem the most likely way to go?

Hope to develop this idea, all suggestions welcome.

bbmac.

:idea:

 

[options]

Good Luck.

 

[Sikorsky]

bbmac - you've got the germ of a good idea there. If you can buy relatively strong stocks and sell relatively weak ones then you are, not surprisingly, likely to turn over a consistent profit.

What you'll probably find, however, is that a stock which is relatively strong one day is not necessarily strong the next - and vice versa for weak stocks. Obviously back-test this for yourself to see if you agree or not....

If you think about it, this is fairly unsurprising - fund managers (in my experience - I used to work at one) will come up with the adjustments they wish to make to their portfolios based on what the client has asked them to do, what the risk management dept. have asked them to do, what they need to do to keep their portfolio in line with the index they are supposed to be tracking (a lot of managed institutional funds these days are glorified trackers), and also their own research + theories, and then pass these on to the trading desk before market open. The trading desk then has the responsibility to have the necessary trades executed at the best possible price throughout the course of the day. By and large, once a decision to adjust a portfolio has been made, the fund manager will want it to be executed ASAP - so all orders would generally be executed before the close of business.

In other words - you may have watched a stock moving up due to institutional buying pressure yesterday, but today that buying pressure could well no longer be there.

Obviously that isn't particularly helpful to your system. What you may find more useful is to study the relative strength of stocks immediately after the open in relation to the index. Any trading desk with a big order to fill is likely to want to space it throughout the day to affect the price as little as possible - so relative strength in the early part of the day could well translate to relative strength throughout the remainder of the day, and vice versa for weakness.

LLOY was a good example yesterday. You'll notice at yesterday's open the UKX dipped quite sharply (in terms of its ATR) whereas LLOY took a much smaller dip. As the index then started to rally slightly LLOY was leading the way, and made a profitable move. Continued weakness in the index meant that LLOY couldn't sustain its strength, but it stayed stronger relatively than the index all day.

Hope this is of some help - good luck with developing your system.

 

[Grey1]

Security software sector was down by 5%.. Dow was down by 80 points.. CHKP out performed the rest of the sector with a good volme while the rest all shadowed the market.. The strength in CHKP needs investgation and I might be playing it as it unfolds intra day ..

Institutions play those stocks that outperforms indecies by buying them high and selling them higher.. These stocks often have a sound fundamentals..

 

[Sikorsky]

It's exactly the sort of situation Grey1 points out above that gives you an edge. The best way to make money is to shadow the institutional action - and the institutions can't trade a stock in any size without materially affecting the price. Above, it appears that somebody with deep pockets wants to buy CHKP - so maybe it's a good idea to do the same.

Of course, the party might end the moment your order is filled....as we know, there is no Holy Grail.