Stock ranking based on performance

I have been mulling over how to decide which stocks to place trades on when the setups appear. With up to 50 to choose from in the potential portfolio I could just make every single trade that sets up ... but that would take a lot of cash to effectively pull off. Seeing as I am aiming this plan at a smaller account that is just not going to work.

So I went to work with my spreadsheets to come up with a simple ranking system to tell me which stocks to consider as first to trade. This is not so much a go-no go ranking but more a relative performance in order to always have money going into the top performers first.

I have toyed around with a similar system using another trade determination method but the loss allowances were too large even though, in the long run, the system worked. It was aimed at capturing large moves and taking more smaller losses. Basically the win rate was low enough to cause concern and would be tough for a small account to weather the potential draw downs.

For this system I figured I could do this using five stats and value them as 1-5 and add them up to come up with a 1-25 valuation. Choosing the stats was not difficult but getting the correlation between the individual numbers and the overall performance had my mind reeling initially. It took sleeping on it and just putting pencil to paper to come up with a simple solution.

I ended up picking four stats and weighting two of them 150% to still come up with a 25 point scale....more or less. As these are relative the absolute number is not as important as the inter-relationship between the various stocks.

Last Price

Pretty obvious what this one is, the lower the price the more shares can be purchased per trade so the greater the absolute gains. I reverse graduated this one as the range is from $50 to $15 and gave it an additional 50% weighting as the lower the price the higher the gains...although under $20 is not as good as just over $20 as the targets get smaller in order to get the moves to still hit the targets. This makes this ranking almost absolute, just drop anything over $50 and trade sparingly anything under $20.

Win Rate

This was an overall win rate based on all the trades taken. I figured that the ideal range was between 60% and 100%. The range was converted to a 1-5 value and I added a 50% weighting to this one as well as it is also a pretty important factor. For really small accounts I could take only the first trade rate as that is the rate for only taking the one position per stock rather than sometimes taking two or three. The second and third win rates, taken on their own, are close enough to the first rate to not make a big difference in this... although I may run it again using those numbers just to be sure.

Annualized Return On Investment (ROI)

Seeing as I have well over a year's worth of data (16 months) this is not an extrapolation to annualized numbers, it's actually reversing the process.

I don't consider this to be as large a deciding factor as the first two stats as anything that is positive is good so I would just rank the level of "goodness". The exception is that a huge winner will automatically get a higher ranking as the scale here is open ended. I used 60% to 340% as the range to work with as ideal. The highest in my first group of stock is 430% but that stock is now priced too high to use this method on, even though it would work well it is producing far too many trades to stay on top of without daytrading it... which has some interesting possibilities for some other time.

Average length of trade

I figured that a reverse graduation from 40-1 days was in order here. Even weighting with anything over 40 getting a fat zero. Like the ROI this is not as important as the other two factors but the lower the average here the quicker the trades are turned around. Once the price starts getting out of range the trade volume usually picks up so if it started out in the $20 range and was followed up while making good money there is no reason to drop it until the other stats drop off as well. But for the purposes of starting out, this ranking will work out well.

Of my stocks that I have run through the ranking sheet CMC came up with the highest valuation at 18.83 while DE was the lowest at 2.33. I figure that I can start by just trading the top few to start and work my way farther down the list as the account grows. None of the stocks are losers so that is of little concern, in fact it serves to diversify the holdings by adding more trades to the table. With an overall performance of an over 80% win rate I can hardly go wrong, just perhaps not hit as high ROIs in some cases.

Jeff.

Stock trade DE, loss taking and profit making

Seeing as I posted a last winning trade for CVA I figure it only fair to post one that had a losing trade as the last trade... or two.

DE, Deere & Co.

The last trade closed on September 17, 2010 for a $3.00 loss, it was a short sell.

The next to last trade closed on Jul 23, 2010 also for a $3.00 loss and also a short sell.

In both of these cases I may not have taken the trades due to the established up trend but, in the interest of consistency I logged them according to the rules rather than muddying the plan. To be honest I have been considering dropping any shorts against the trends but even some of those have been very good trades. I mitigate the risk by only entering one position and I raise the entry by a dollar at least. This also raises the target considering that the following drop may not be quite as far.

STATS for DE:

24 first entry trades, 17 winners
5 second entry trades, 4 winners

1 third entry trade, 1 winner

$41.00 per share gains (using 100 share trades that is $4,100 for the period from June1, 2009)
Total days in any trade 169 of 483 possible.

I ran the trades at $1,000 per trade initially and rolled the profits right back into the next trade to provide compounding returns. Allowing for the commission structure at Questrade of $4.95 per trade (I just rounded up to $5 for ease of math) the $1,000 would now be $1,717

That is a 71.7% net profit. Like CVA, while consistent, it is well below the average.

Having said that, had I just bought and held the stock on June 1, 2009 at the average daily price of $44.65 it would be at $71.49 now. The gain of $26.84 represents an 60.0% profit. Also, this drive to higher prices is what lead to more losers... 6 of the 7 losing trades were shorts, and one break even of a total of 30 trades. That is still a 73.3% win average even at that.

It is worth noting that I have one stock with a win rate as low as 64% and the ROI is still 35%. I think that is respectable.

Jeff.

CVA, recent profits in this stock trade

One of my recent trade targets hit was in CVA, Covanta Holding Corp.

I had targeted entries at $14.00 and $13.50 to open long positions which were both hit on Aug 12th. A double position. I know I could have watched the intraday and had a better average entry but that is not the point with my trading plan.

Keeping it simple and to not be required to do any chart watching during the day is my goal. I have done a lot of daytrading and the like and, while it can be lucrative, it can be stressful as well.

Exit profit targets were at $15.00 and $15.50.

The first was hit in a few days for the $1.50 per share goal.... 11.1% in 5 days, nice but trades this short are not not always typical, although there were a number that were less than 10 days. I like those for obvious reasons.

The second target was hit on September 24th with an intraday high of $15.52. Another $1.50 profit and 10.7% gains.

The entire trade lasted 43 days.

Over the entire study period this stock was not a great performer using my plan but it was consistent, and that is the primary goal. More consistent stocks over the longer term leads to more relaxed and profitable trading.

STATS for CVA:

9 first entry trades 8 winners

2 second entry trades 2 winners

$12.50 per share gains (using 100 share trades that is $1250 for the period from June1, 2009)

Total days in any trade 325 of 483 possible

I ran the trades at $1,000 per trade initially and rolled the profits right back into the next trade to provide compounding returns. Allowing for the commission structure at Questrade of $4.95 per trade (I just rounded up to $5 for ease of math) the $1,000 would now be $1,931.

That is a 93% net profit. While consistent, it is well below the average.

Having said that, had I just bought and held the stock on June 1, 2009 at the average daily price of $14.24 it would be at $15.41 now. The gain of $1.17 represents an 8.2% profit.

Jeff.

COG and the resource stocks... Oil specifically

While plowing through some numbers I was reminded of an old rule I used to observe while coming up with trade ideas.

Do not trade commodity related stocks... or at least ones that are directly tied to some of the volatile commodities. Oil and gas were on the top of the list.

This was driven home as I reviewed the trades for COG, Cabot Oil and Gas Corp.

The profit and loss was barely above break even after 12 months and the winning trade rate was under 60% while my overall average is over 80%. I glanced at the rest of the year to date and saw some very obvious whipsaw chart action. Normally I like that sort of activity but the stock is just of a high enough price and the volatility is also just high enough to compound the effect of knocking me out of more trades.

Actually, I should have discounted this one just from glancing at the chart last year while I was selecting stocks to trade as the volatility and pattern obviously were outside of my parameters. Waste of time.

Keep in mind that all I would have to do in order to trade this stock is to widen the stop losses and hold out for better entry prices... but that means having two trading plans and that is not in the plan right now.

Jeff.

CMC Live Trade Update

I was looking over my charts today and realized that I need to adjust the exit target for CMC. The second exit target needed to be lowered by $0.50 to $13.50 due to my shift in profit targeting but, more importantly, the primary entry needs to be raised to $13. 50 due to the next trade setup.

I already posted the first change in the Live Trade column so I will update the latest exit and post the next trade setup.

Next trade entry will be:

Entry 1 - $13.50 Target - $15.00

Entry 2 - $13.00 Target - $14.50

Entry 3 - $12.50 Target - $14.00

Full Stop at $12.00

The exit targets may shift depending upon how low the next move goes... if it only fills one or two of the trades then the exit may shift down a bit on the first trade in order to secure profits. and to set the next short trade if it sets up as well.

Jeff.

Putting the trade in context, CMC

I have more history on CMC other than just the trade setup that I posted, I have the whole year and change so I thought I should put the stock and activity into context relative to the current open trade.

A quick note about the changing profit targets. While I had to go back to the charts to see how the target limit orders would have filled it was based on the trades that were dictated already. I do wish that I had actually placed on thee trades and made some real cash... too busy with other plans. The primary entries would not change and most of the second and third would not either but I wanted to check the executions. Seeing as in any case where the primary hit full target the 2nd and 3rd would, necessarily, have also hit their targets as they would have been at lower prices.

CMC- Commercial Metals Co.

40 Trades since June 2009 (these are divided between 1st, 2nd and 3rd entry targets)

First Entry = 19 74% hit profit target

Second Entry = 16 81% of these hit their profit target

Third Entry = 5 80% of these hit their profit target

Not every target is a full target as there are some that the targets are set tighter on due to the next entry being so close, playing the short term moves in both directions can do that. Basically, one exit for a long position is at the same price as the next short entry price so the trade essentially flips. The key is in selecting valid targets.

I plug in a trade value of $1,000 and consider that the trades are all simple with no compounding therefore the trade value of $1,000 is always the same.

Total Profits = $1,781.00

Then using a starting trade value of $1,000 and compounding the profits into the very next trade.

Total Profits = $ 4,885.50

Unlike other speculative and subjective back testing these are firm numbers, now they are adjusted for my commission structure with Questrade so figure in 40 round trades worth if yours are higher. I used $5 commissions or $10 for the trade in and out. It's actually $4.95 for up to 495 shares.

Also worth noting, if I were actually in the trades and was putting money on the line every time I would be able to get better entries and exits in many of the cases but I am using my firm rules based system for both entry and exit for the sake of objective consistency.

Jeff.

New targets for stocks under $20

In my data analysis I have found an interesting bit of information having to do with entry prices and profit targets specifically for stocks priced under $20.

I had posted entries for CMC at $14.50 and $15.00 as a short sell and posted the targets as $13.00 and $14.00 respectively creating a $1 and $1.50 gain. I will be changing that.

Basically any trade will have three possible entries for stocks under $20:

Considering a long trade rather than the CMC short above for demonstration purposes:

(BTW CMC scooted back above the $14.50 first entry target today.)

Entry 1 - $17.00 Profit target - $18.50 Gain - $1.50

Entry 2 - $16.50 Profit target - $17.50 Gain - $1.00

Entry 3 - $16.00 Profit target - $16.50 Gain - $0.50

Full stop at $15.50 without extenuating circumstances

A full trade hitting the targets would gain and average of$1 per share overall.

A full stop will lose and average $1 overall.

If each entry were 100 shares that would be a $300 gain or a $300 loss.

In crunching the numbers for the trades I have so far found that over 75% (this is not an average, this is the minimum taken from the poorest performing stock) of the first entries hit their target profit of $1.50. It led me to wonder why I should limit the second entry to a $1 profit when, 75% to 92% of the time the larger profit gets hit which means that the lower profit also gets hit on the way past. In fact it will hit between 86% and 100% of the time. The same goes for the 3rd entry although if the third entry gets hit the average of the first getting hit afterwards is between 72% and 80%.

It is worth noting that no matter the entry the Maximum Loss Allowance will always be the same. Therefore it would be prudent to increase the profit potential, given the odds of success, in order to skew the trades in favour of better gains for capital risked.

In that vein I left the entries alone and changed the exits to allow a full $1.50 for each trade entered. This results in an average $1.50 overall compared to the average $1.00 overall.

For the same entry of three trades at 100 shares that would be a $450 gain or the same $300 loss.

I like a profit / loss ratio of better than 1:1 and this at least makes it 1.5:1. Add that to an over 72% win rate for just these larger trades and that really adds up fast.

Jeff.

First live trigger, CMC short

CMC, Commercial Metals Company

Of course the first live trigger that I post is a short sell, and it also was hit last Monday... which makes this "not so live" but still active. This one has been a solid short five times this year alone. Now the price being around the $15 mark makes it a smaller per share target but every profit is a profit.

The setup had been for an entry to sell to open at $14.50 and a second position at $15.00. Both orders were filled.

Profit targets are $13.00 for position one and $14.00 for position two giving $1.50 and $1.00 per share respectively.

Stops to be set at $16.00 for both positions.

Assuming that the targets are hit and based on the average entry price of $14.75 and the average exit price of $13.50 the ROI would be 8.5%

Loss would also be 8.5% for a profit loss ratio of 1:1.

This one is still active and orders may yet be filled for $14.50 today. I would set the stop at $15.75 at this point.

Jeff.

Throwing in the towel and going live

Well, I've decided to close down the day trading subscription. Between waffling on the moderators part with a variety of formats and changes to try to appease the large numbers in the room it has been watered down to a point of no return. I will finish out the week as there are a few trades that we are holding that I do not think will work out, but I will not treat them as total losses until expiration on Friday.

Throwing in the towel, figuratively speaking.

Next up is a new beginning with an old plan.

I have decided, after a long bout of testing other services and having them fall flat on their promises, that I can do much better. In that vein I will be starting my own service in the next short while to provide email alert based trades with website reference backup.

This will be nothing fancy, just straight up trades with clean and clear entry, targets and stops and perhaps two or three ways to play a trade depending on the setup.

I have tried a number of self made plans and have seen some great potentials and had a few go flat over the past while. So rather than get into forecasts and future gains and what not, I decided to grab five, more or less random stocks out of about 50 that I had selected over a year ago to run trades on. With all the data that I have it does not take too much to figure out the profit and loss with a sliding account sizing scale.

Stock trades logged thus far for ABB, ABX, AEO, CAH and GDX. I started just going alphabetical then bumped up a bit, the point being I did not select these for any performance reasons. Out of the total of about 45 trades total over the last 15 months, depending upon using an aggressive or more conservative approach to the strategy, the returns are very nice... no not spectacular, or explosive ... nice and regular.

A cash only account gain was between 70% and 100% depending upon the aggressiveness chosen and between 210% and 290% using 1/3rd the cash in a 3 times margin account to end up with the same buying power.

Now that is only with 5 stocks and thus only having 5 concurrent trades but using full capital in those five trades... not necessarily the absolute best plan. I'll setup a better gauge later and add in the rest of the trades into the mix.

Anyhow... off to bed now and I will post more details later.

Jeff.