I currently have 128 unique patterns that have been trained on S&P data, ES futures data, NYSE-TRIN, and NYSE-TICK. Each of these patterns were trained to find a "statistically valid" edge in the market. Most of these edges are relatively minor, such as increasing the chance the stock will be up 5 days from now more than is possible due to "random chance". Based on the number of patterns the stock matches increases its score. The stocks with the highest scores end up on my watch list for the next trading day. From this score, I am able to also gain insight into what type of "expectancy" I have over the next 5 to 20 days. For instance when I purchased NEM I had a +3.5% expectancy over 5 days and +8% over 20 days. These expectancies are generally inaccurate, but do help with the general direction. The system will not remain stagnant, I am working on another 100 or so patterns that will eventually be merged into the primary scoring system increasing the overall accuracy. While the stock picks may look like "bottom fishing", its actually just a statistical by-product of which stocks are more likely to be higher 5 days from now. A stock which has been beaten down recently has a better chance of a "bounce" over the next few trading days. This was confirmed the by the patterns that emerged. Combined with good risk management, you can make money.
It seems like you put some thought into this which is good. Hey, not everybody does. But just like selling premium gives a nice consistent edge, it's the outliers you have no control over. If I had a dime for every stock near a 52 week low that suddenly gapped down huge one day for no reason I would be retired. And no stop can save you from the gap. And I assure you, the trading gods will make certain that you suffer no such fate while your size is small. They will patiently wait for you to get some confidence and on your biggest position months from now, they will unleash their wrath. We've all been there. In light of this prophesy on my part, I suggest maybe turning your attention to the world of ETFs. There are over a thousand of them now and while they can still gap down a few % over night, they won't gap down 25% or 50%.
You make a valid point. While designing this method, the gap risk was apparent. I had considered purchasing deep in the money call options as a way to limit this exposure. It would produce a near 1 to 1 move with the underlying with a very small premium. But there would be some slippage incurred. I had not considered switching to a more stable instrument such as ETFs. To be honest outside of a few DOW, S&P, and Nasdaq based ETF's I am not very familiar with what is out there.
If you live near a book store, grab yourself the latest issue of Bloomberg Markets magazine. They have a pullout guide in there of all the latest ETF's. In the meantime you can start here: http://etf.stock-encyclopedia.com/ http://www.etfguide.com/etftickerguide.php
I have updated my per trade risk to .5% per trade which equals $125. Purchased 312 shares of RSH at 6.24, stop at 5.85
Good luck. I think you may be on to something as more than a handful of academic quant finance papers have pointed out the statistical significance of 3-5 day negative correlation of returns.
Only one stock GNW is on my watch list for tomorrow. More details on my blog <a href="http://www.mystockanalysis.com/stocks-to-buy/stocks-buy-4212/">Stock Analysis 4/2/12</a>
The strategy struggled today, but no positions were stopped out. For tomorrow I am watching GNW and BTU
I was stopped out of NEM and APOL this morning for a combined loss of $200 I purchased 200 shares of GNW at $8.05, stop set at $7.42 I purchased 100 shares of BTU at 28.77 stop set at 27.57