This thread is a takeoff on a thread by abogdanâ¦
In this thread he proposes a strategy which when applied to high beta stocks will, and I quote from his original postâ¦âEffective return will be equal to appr. 1.97% a day which will give you annualized (compounded) about 100*Original capital. Not bad! And there is no risk! You are always "with the market".â
Later in the thread he posts the formula in full.
Read the original post and you will see why I have called this the âflipperâ strategy. I am always intrigued by strategies where âthere is no riskâ so after a series of comments I promised to code it up and post the results.
Ok, I had time this weekend to code up the abogdanâs âflipperâ strategy in Wealth-Lab. I will present a spreadsheet with the trade results at the end of this fairly long post(s) which will attempt to explain certain decisions I made during coding. To perform this test I downloaded over 100,000,000 records of bid/ask/trade data for KLAC. I picked this stock only because it is the original stock referred to in abogdanâs post. The data was scrubbed of erroneous (or irrelevant) ticks by removing any record that fell more than 0.5% away from the previous record.
First let it be said that I am actively seeking comments on where I went wrong. Expect me to concede when you have a point and expect me to resist if I feel that you do not. In my experience (I am neither a newbie nor a Livermore) good trading systems end up making sense and trading logic does not magically disappear in a mist of mumbo jumbo. There are enough of us here that know how to move shares that we should be able to generally agree on that process. Letâs have at it.
Things I DO NOT KNOW precisely about this system (or areas where abogdanâs statements conflict with his formulas):
I am unsure how abogdan calculates his âguaranteed price moveâ. I will quote from his original postâ¦â
If you take daily price moves and for each day you take either (High - Open) or (Open -Low) which ever is greater then divide it by Open you would get daily guaranteed price move (Up or Down) For KLAC, for example, there were no days in the past 400 trading days when this move (up or down) was less than 1.045% (Let' say 1%).
I find his formula in conflict with his conclusion. In the past 400 days, using his formula, I find more than a dozen days with less than 1.045% movement and 4 with less than 1%. (8/15, 8/25, 9/17, 9/19). Actually, there are more than that but I left out all published half market days because is seem a fair conclusion that with the added risk, this system wouldnât be traded on such days. It is possible that my data is flawed and I would be happy for someone to point this out and back it up. Assuming good data and applying his formula to the data, the number that he starts with (1.045%) and uses for his current calculations would not have been used since March of last year and the number that should have been being used is 0.77%. This delta will play prominently in the success or failure of this system.
Since his posted formula makes sense, I decided to ignore his conclusions and apply the formula as posted. I think what he wrote was merely in error and would be surprised if the formula is wrong.
Other assumptions that I made in an attempt to make the results as ârealâ as possibleâ¦
I thought long and hard about how to handle the transaction at the âflip triggersâ. If Iâm going long do I use the next offer as my transaction value, or do I take out as many offers as is necessary to get the needed shares, or do I use the following trade values etc., etc. For programming ease I finally decided to just use the FIR smoothed bid/ask values at the time of the trigger to value the transaction. In the case of smaller orders this is probably quite close. For larger orders I would expect the slippage to increase even above these calculations.
For the profit target and trailing stops I decided to use a similarly smoothed average of the previous trades rather than bid/ask data. I consider this to be a better reflection of the actual market and probably would have used these values to trigger the flips if abogdanâs formula hadnât specifically said otherwise.