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.