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Trading Strategy for Busy People (BPTS)

 

Short description
Every day we supply a list of two stocks. This day we call the day of Busy People Trading Strategy Analysis (Day of BPTS Analysis). On the next trading day before market opening we place the LIMIT - DAY orders to buy these stocks. The LIMIT prices are equal to 95% of previous closing prices of the corresponding stocks.

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.

Day of BPTS Analysis Buy using LIMIT orders Hold Hold Sell on the market opening

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 Trading Strategy
Like our other trading strategies this strategy is based on the computer stock selection. Trader's emotions play no role in this selection. This approach allows us to play against the crowd.

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.

 

General
The strategy is based on a statistical analysis of the US stock market. We have found a method of stock selection which allows us to find the stocks with the highest growth potential. These stocks are presented in our daily list of potentially bullish stocks. This list is published on our website every day before the US market opening. We have found that buying two stocks with maximum price drops (in %) during the next trading day and selling them in two days on the market opening is a very profitable strategy. We call this method the Basic 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?

Basic Trading Strategy Busy People Trading Strategy
The probability of finding stocks to buy is close to 100% The probability of buying stocks can be much less than 100% and depends on the LIMIT price.
We can divide the trading capital into three parts and every part of the capital should be used to buy two stocks. We can also divide the trading capital into three parts and use every part to buy two stocks. However, because of the stocks are held there is a small probability of a money deficit (*).
Probability of larger than 10% returns per trade = 15%. Probability of smaller than -10% returns per trade = 4% These probabilities depend on the LIMIT price. All probabilities for BPTS are better than probabilities for the Basic Trading Strategy if we consider transaction costs.
Historical quarterly return = 43% Historical quarterly return = 18%.
We need to watch the market at 4:00 p.m. We can place all orders before market opening.


(*) About the possible money deficit. Suppose we are lucky and our Limits are touched every day.  So, we buy two stocks on days #2, #3 and #4. Before market opening on day #5 we need to place two LIMIT orders to buy two other stocks and two MARKET orders to sell stocks which were bought on day #2. The BUY orders will not be accepted because we have already spent all our money. We should sell stocks first and then place the BUY LIMIT orders. This means we have to wait till the market opening and place BUY LIMIT orders after selling the two stocks which were bought on day #2. However, the probability of these events is very low.

 

Statistics for the Busy People Trading Strategy
Here we present some statistical data for the Busy People Trading Strategy for 1996 - 1999 period. We have assumed that the transaction costs (brokerage commissions and bid-ask spreads) are equal to 0.75%.

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:


Selected stocks for the Busy People Trading Strategy


Date of BPTS Analysis (YYMMDD): 020821

TICKER CLOSING PRICE 95% LIMIT
RGC  16.25  15.4375 
ASH  29.7 28.215



The full list of sorted stocks (price changes in % during the last day are shown)
RGC   0.3 
ASH   0.47 
COL   1.79 
AZN   3.4
XJT    4.9 
UTSI  11.36 

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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