If the stock prices touch the LIMIT levels then the stocks will be bought. We hold these stocks for two days and sell them on the market opening of the third day.
The trading capital should be divided into three parts and we use these parts to buy stocks every day.
The basic ideas of the Busy People
This is a short-term stock trading strategy. Our time frame is three to four days. Our strategy is not a daytrading technique which needs a large capital to make money from 1/8 - 1/4 stock price moves.
We do not need to watch stock prices during the trading day. The orders to sell or to buy can be placed before market opening. This is why we call this strategy the Busy People Trading Strategy.
However, this method is not good for people who cannot place BUY orders at 4 p.m. (market closing). Many of us are too busy be watching the market at this time. Some companies even use firewalls to limit the internet access for their employees during working hours.
The Busy People Trading Strategy (BPTS) allows us to overcome these difficulties. What is the difference between the BPTS and the Basic Trading Strategy?
Statistics for the Busy People
Why is the expected quarterly return of the Busy People Trading Strategy is less than the expected quarterly return of the Basic Trading Strategy. The answer is simple: the quarterly number of trades for BPTS is less.
The next plot shows the number of trades per quarter (in %) relative to all possible trades. If we choose the LIMIT price to be 95% of the closing stock price the number of trades for the BPTS is only 25%. So, on average we can buy only one stock per two days.
The next plot shows the growth of the virtual trading portfolio during 1996 - 1999 for the BPTS depending on the LIMIT price. Twelve times growth in 3.5 years is not bad, but using the Basic Trading Strategy gives an even more exciting result.
The next plot shows the dependence of the probabilities of the large stock price changes per trade on the LIMIT prices. If the LIMIT = 95% then the probability of the price change > 10% is equal to 18% and the probability of price change < -10% is equal to 7%. This is better than the results using the Basic Trading Strategy if we take into account transaction costs.
The next plot shows returns per trades (transaction costs have been taken into account) and the risk to return ratios as functions of the LIMIT prices. For LIMIT = 95% and less, the risk to return ratio is very low and stable. The quarterly return has its maximum in the range 95 - 98%. So, the optimal value of the LIMIT = 95% of stock closing price.
The next plot shows the probabilities of positive returns per trade for various Limits. The transaction costs = 0.75% have been taken into account. If LIMIT = 95% the probability of positive return = 64%. So, we should accept that in 1/3 of trades we will lose money.
5. Example of a BPTS daily file
Such files are published on our website every day. They look like:
At the end of the file you can see the whole list of stocks with %% change during the trading day. All changes were positive and in this case one should select two stocks with minimal %% price change: RGC and ASH as it is shown in the table.
On the next trading day (8/22/02) we should place LIMIT DAY orders to buy RGC and ASH. The limit prices are equal:
RGC LIMIT = 15.4
ASH LIMIT = 28.2
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