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Trading Strategies for Canadian Stocks  

Table of Contents
1. Actively trading stocks
2. Stock selection system
3. Trading strategies
4. History study
5. History files
6. Daily and quarterly returns
7. Conclusions
8. Disclaimer
9. Daily Service


Actively trading stocks

We consider our stock selection system to trade Canadian stocks. The main difference between US and Canadian stock markets is the number of actively trading stocks. The next figure shows distribution of daily stock trading volumes.

One can see that the number of stocks with daily trading volumes between 100,000 and 200,000 is about 6 times larger for US markets. However the Canadian market is active enough to use our trading strategies.

 

Stock selection system
We used our old stock selection system which is described in our e-book Short-Term Trading Analysis. Every day we select potentially bullish stocks from the set of actively trading stocks. For US market actively trading stocks are selected using criteria:

US Market
Trading volume on the day of the analysis > 200,000
Closing price > $10

The number of such stocks for US market is about 1000 - 1200. For Canadian stock market we must reduce these criteria to have more stocks to choose from.

Canadian Market
Trading volume on the day of the analysis > 100,000
Closing price > $5 - $7 depending on the trading activity

Using these criteria we have about 200 - 300 stocks daily to obtain the list of potentially bullish stocks. This is the only difference between stock selection systems for US and Canadian markets. Using this system we are able to find almost every day about 3-6 potentially bullish stocks.

However even using such "lighter" criteria for the actively trading stocks we are not able to find the potentially bullish stocks every day. For US market the list of such stocks is empty only 2-3 times a year. For Canadian market one can expect to find the empty list of potentially bullish stocks approximately once a week.

 

Trading Strategies
One can use our US stock trading strategies. However a trader can slightly modify these strategies taking into account higher volatility and smaller number of Canadian active stocks. The scheme of strategies is shown on the picture:

Basics Strategy (Canadian Stocks)
On closing of day #1 a trader buys all stocks form the list of potentially bullish stocks (usually 1 - 3, average = 1.7) if these stock prices are lower than on closing of Day #0 (CLO1 < CLO0). The stocks should be sold on the opening of Day #4. This must be repeated every day, so, one third of trading capital must be used for daily buying. This is similar to our US stock trading strategies.

Low Risk Strategy (Canadian Stocks)
This strategy is similar to the Basic Strategy but a trader should buy stocks only if they drop more than 5% during Day #1, i.e. CLO1 < 0.95 CLO0. The average number of stocks for buying is 0.5 per trading day.

 

History study
We will consider the period from October 1999 to June 2001. During this period the TSE 300 Composite Index was changed from 6931.3 to 8250.6 (+19%). It corresponds to the average daily return of 0.036%. The next picture shows the chart of TSE-300 for this period.


The next picture shows the distributions of returns (in %) for one trade for the Canadian stock Basics and Low-Risk trading strategies.

The average returns (Rav) per trade and risk/return ratios for this period of time are equal to:

Basic Strategy:           Rav = 4.3%     Risk/Return = 3.1
Low-Risk Strategy:    Rav = 9.5%     Risk/Return = 4.3

Probabilities P1 of finding at least one stock to buy

Basic Strategy:           P1 = 65%
Low-Risk Strategy:    P1 = 29%

Therefore, a trader will find the empty list of stocks approximately 1/3 of trading days if he uses the Basic Strategy and 2/3 if he uses the Low Risk Strategy.

The average returns for trading Canadian stocks are larger than for our strategies for US stocks but the risk/return ratios are also larger.

 

History files
One can make additional analysis using history files. We published files for the Basics and Low Risk trading strategies. These files are text files which show all trades during the considered period of time. They organized as

Date(yymmd)  Ticker   CLO1   OPE4   Return(%)

One can find Recent Picks using the links on the bottom of the page

 

Daily and quarterly returns
Method of calculations of the average quarterly and annual returns are described in our e-book How to Win the Stock Market Game. Let us shortly describe the method.

The average daily returns Rd (expected)
Basic Strategy
Zero transaction cost:    Rd = 4.3 * 0.65 / 3 = 0.93%
1% transaction cost:      Rd = (4.3 - 1) * 0.65 / 3 = 0.72%
We divided Rd by 3 because we use 1/3 of trading capital to buy stocks on trading day.

Low Risk Strategy

Zero transaction cost:    Rd = 9.5 * 0.29 / 3 = 0.92%
1% transaction cost:      Rd = (9.5 - 1) * 0.29 / 3 = 0.82%

Let us remind that for this period of time the average daily return of the TSE 300 index was 0.036%.

 

The average quarterly returns Rq (expected)
Basic Strategy
Zero transaction cost: Rq = 1.0093 ^ 63 = 1.79 (79%)
1% transaction cost:  Rq = 1.0072 ^ 63 = 1.57 (57%)

Low Risk Strategy

Zero transaction cost:    Rq = 1.0092 ^ 63 = 1.87 (78%)
1% transaction cost:      Rq = 1.0082 ^ 63 = 1.67 (67%)

What is higher than the quarterly returns of our strategies for US stocks.

 

Conclusions
The analysis showed that returns of the our slightly modified trading strategies for Canadian stocks are higher than the average returns of our strategies for US stocks. However, the risk/return ratios are also much higher. A trader must use smaller amount of capital to trade Canadian stock because of higher risk.

 

Disclaimer
We believe that all presented data are correct but we do not guarantee this. This publication is for informational purposes only. Trading involves risk, including possible loss of capital. We do not guarantee future results and we are not responsible for any losses or lost profits resulting from trading decisions based on this publication or information obtained from our other recommendations.


Daily Service
Every trading day we publish the list of potentially bullish Canadian stocks using selection criteria mentioned above (see Example). If you would like to check how successful are our Trading Strategies you can subscribe to our Canadian Stock Service.

Attention: Canadian stock files can sometimes be empty. This is related to smaller trading activities on Canadian Stock Market.


 
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