Opinion for a strategy?

Discussion in 'Strategy Development' started by elsupremo, Nov 17, 2010.

  1. So, basically this will be one of the simplest systems and hence I have big doubts about it. Here is the simple idea:

    1. Watch the biggest daily gainers on Nasdaq.
    2. At some time (say 10:00AM new york time) buy some of the most advanced. Alternatively, you might find out what stocks are movers during the night session - 4-6:30 and place some limit orders for the next regular 9:30 session.
    3. Close them an hour later or so...

    Actually, i can't even think of a simpler idea...below are the benefits an the obstacles the way i see them:

    Benefits:

    - You try to pocket from overreactions:
    let's face it: Humans are irrational beings, all these academic claims that investors are rational, EMH, etc. are bollocks. Also...once the stock start climbing - more and more online news editions will report it as a daily winner - which should have additional effect on your side. Finally, let's not forget that options traders in Chicago might see the stock movements and buy options which might have again effect on the stock movement itself. In addition, markets in london should do their "job" in that manner too, prior to closing their trading day. And of course, you can yourself buy options out the money or cfds to leverage your winnings. I've seen 533% change in otm call option of a daily nasdaq winner stock - and this stock wasn't even a penny one! If you don't believe me...well i don't care :).

    Problems:

    - Check here (if you haven't heard of it already):
    http://en.wikipedia.org/wiki/Gambler's_fallacy
    OK, now that we've finished with the psychological "ala George Soros" explanation - let's take the other side: the academic skepticism. In other words: Just because a stock has a daily gain of 20% - there's no reason to think that this trend will continue. In a similar fashion: If a toin has tossed tail 20 times - there's no reason to belief that head is more likely to occur. Actually, the probability for such thing to happen is 100/(0.5^20*100)...which according to wolframalpha is more than one in a million (about 1.048 million).
    It's a small chance - but still possible, in other words: if you toss the coin a million times - there's a faily big chance for such thing to happen. Now, for the actual probability - don't ask me since i am too lazy atm for that - but here is the guideline to calculate it, google: normal distribution cdf...or binomial distribution since it's a discrete case.


    Of course the problem is that the coin has no memory....but investors have memory. You can't say that if a stock has surged 20% it won't go further because investors have no memory...it's just stupid...
    The problem is: why is this stock going with its trend?
    Again, the answer might be just in the correct timing.

    what do you think?
    10x!
     
  2. Do I understand you correctly? Are you arguing that very low probability events have high probability of occurring if the experiments are performed many times?

    No. The probability of getting 20 tails in a row is the same if you toss a coin 20 times or a million times. Each toss is an independent experiment.
     
  3. So you are saying that you want to watch the market for the first half hour and buy into the top gainers? Have you thought about the probably that will be about the time they are moving into a resistance level and about to start dropping again? Buying AFTER a strong run up is not a real good idea.
     
  4. with simple rules like that, backtest it. no need for random opinions when the stats can tell you what you want to know.
     
  5. no shit....
     
  6. I know, and that was my initial point...when you buy by the end of the day a company with a 50% daily roi...will be kind of too late - as you mentioned it. That's why the general idea is to grab a piece of the pie very early in the morning. Also...I will never buy the top-top winners - but some companies that show a promising trend with say 4-5% move so far, hoping to reach a double figure at some time today. Also, I am not saying that you should keep the stock till the very end of the day - holding it before reaching resistance will be the best thing to do, which would mean something like an hour or two or so.
     
  7. 10x...and this is one of my very plans...so to speak. I am personally a computer developer, so i am planning to test the strategy over historical intraday data and see the results. Other than that, i might spend a month or so papertrading the strategy in some online simulators like the Barclays CFD simulator, Optionsxpress virtual trade, etc.
    Basically, if the results of the backtesting are promising - i will dig deeper into the fundamental aspect - that is...to find out what news sources report daily nasdaq winners and during what time of the day exactly. And of course...are there any news coming with the given stock.
    Finally, i don't think buying the penny stocks is a good idea and buying stock with low volume seems risky in this strategy too. But...still can't be sure about these 2 conclusions.