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Lorena,
Don't know why the attachments didn't make it. I'll copy them below
instead of attach.
JimG
-----------------------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: Metastock <metastock@xxxxxxxxxxxxx>
Subject: Stock Trading Building Blocks
Date: Saturday, November 14, 1998 7:46 PM
All,
This may be slightly out of scope in that it is a larger topic
than just MetaStock charting and testing, although that's definitely a
good part of it. I thought it would be interesting to share our ideas
on the building blocks or elements of a complete stock trading
methodology.
I have tried to build my own trading system on what I think is a
logical set of building blocks. The elements of my trading system
follow:
1. A systematic method of narrowing the universe of stocks to a few
potential trading candidates that have certain characteristics that
have resulted in successful trades in the past. My searches or
filters use a combination of fundamental and technical criteria.
2. A market tracking mechanism that indicates when it is OK to enter
a position and whether that position should be long or short. I use
trend channels for this.
3. Tests and a methodology for making the final stock selection for
new positions.
4. A money management system that limits overall portfolio risk on
each new position and tells how large each position should be. I
won't risk more than 5% (usually 2 to 3%) of my portfolio on any one
position.
5. A method for setting stops and targets although targets are not
always required. Stops should be based on Technical Analysis rather
than an arbitrary percentage or point move. Stop placement tied back
to money management can affect position size. Again, I use trend
channels for this.
6. An exit strategy. Mine is simple, exit when a target or stop is
hit.
Does anyone have any comments on the above building blocks? Any
to add? Do you disagree with any? Is anyone interested into going
into details on each of the building blocks?
JimG
--------------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: Metastock <metastock@xxxxxxxxxxxxx>
Subject: Building Blocks - Charts, Trendlines, & Channels
Date: Sunday, November 15, 1998 4:29 PM
All,
Before I discuss trend lines and channels as I promised, I want
to say a few words about the type of charts. Most people use H,L,C
bar charts for their charting. I don't, I use CandleVolume charts. I
always thought that having an arbitrary time period such as a day for
the x axis of a price time chart didn't make a lot of sense. When
Arm's wrote his EquiVolume book back in the 60s he made his x axis a
function of volume per unit time. This made a lot of intuitive sense
to me. The more volume in a given trading period, the wider the bar.
I've been using volume based charts every since then. When MetaStock
started using CandleVolume charts I switched to them. In CandleVolume
charts, the width of the candle is a function of volume, just like
Arm's equiVolume charts. I thought the additional information on the
candlestick should be valuable, although I'll be the first to admit
that I have never gotten any consistent results based on only
CandleStick patterns. I keep using CandleVolume charts because I like
the way they look and maybe, just maybe, I'll run across that magic
pattern some day <G>.
The reason I go into this, is that if you are using trend lines
or channels for signals, you will get different signals and different
results with H,L,C bar charts and CandleVolume charts. I'm very
comfortable using CandleVolume charts and happen to think that they
give better results than H,L,C bar charts. Having said that, I also
have to say that I have absolutely no proof of that. I've never done
a systematic study and haven't seen any done by others. But I feel
they are better and it's important to go with what you believe <G>.
For constructing trend lines I prefer Trader Vic's methodology.
For a Trader Vic up trend line, start with the lowest low in the
timeframe being considered. Draw a line to a low before the highest
high in the time frame and extend the line to the right. It's
important that you pick the right low to draw the line to. It must be
before the highest high in the timeframe and it must be the one low
that will allow you to draw a line that doesn't intersect any data
before the highest high. A down trend line is just the mirror image.
You start with the highest high in the timeframe being considered.
Draw a line to another high before the lowest low such that the line
does not pass through any data and extend the line to the right. To
construct the trend channel, draw a parallel line on the other side of
the data that only touches the data at the extreme point. That is it
doesn't intersect any other data points. This is easy with MetaStock.
You can hold the CTRL key down, then hold the left mouse key down once
you are on the original line and drag a parallel line to where ever
you want it.
I use these Trader Vic type channels for my long (years) and
intermediate term (few months to over a year) channels. I use the
channels to get my buy signals and set my stops. If they are wide
enough, I may even use them for setting my targets, but that will be
the subject of a later post. Right now I want to just concentrate on
how I construct my trend channels. There is a problem with using
Trader Vic type channels for Short term (days to few months) channels.
That problem is that you will tend to get too many false breakout
signals for a data set that hasn't gone through one or two significant
corrections. To try to overcome this problem for short term channels,
I use the Standard Deviation channels built into MS6.5. The problem
with this type of channel is to know where to start and end your
channel. I did not want this to be arbritary, so after some
experimenting, I decided on the following. For up trend channels, I
start my channel immediately to the left of the lowest low in the
timeframe being considered just like Trader Vic. Then I end my
channel immediately to the right of the highest high in the time frame
being considered. Initially, I set the deviation at 2 and extend the
channel to the right. Anytime a new high is hit, I'll drag the right
end of the channel just to the right of that new high. As soon as I
get a decent reaction in the stock data, I'll check to see if I should
change the deviation. I'll use 1, 1.3, 1.5, 1.8, or 2 for the
deviation, using the lowest number that will bound all the data
between the end points without intersecting any. After a few months
with at least two good reactions, I switch to Trader Vic type trend
lines.
That's it. That's the way I construct my trend channels so there
isn't any arbitrary settings. Any questions or suggestions?
JimG
--------------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: Metastock <metastock@xxxxxxxxxxxxx>
Subject: Building Blocks - Trend Channels
Date: Sunday, December 13, 1998 12:52 PM
All,
Last week I talked about how I use trend channels to set targets and
stops to tell me when to exit a position. This week I'm going to go back to
the beginning to discuss how I use trend channels to tell me when to enter a
position. I'd appreciate any comments pro or con on this methodology.
I've come to depend more and more on trend channels as my primary
technical analysis tool. The theory of trend channel investing is simple.
First you have to construct the trend channel. After that is done the rest
is easy. For up trend channels you open a long position right after a stock
bounces off the bottom of a channel and close the position when it hits the
top of a channel. Vice versa for down trend channels. I treat horizontal
channels like up trend channels for trading purposes.
Of course, I expand on this simple methodology slightly <G>. First I
construct short, intermediate, and long term channels on all my charts. My
definition of short, intermediate and long term is flexible. In general
short term is days to up to a few months, intermediate term is a few months
to over a year, and long term is years. I like to open a position in the
direction of the long term trend channel when an intermediate term trend
channel is broken and the stock reverses in the direction of the long term
trend. Since this is a fairly rare occurence, my secondary method which
occurs much more frequently and is, therefore, the one I use the most, is to
enter a position when the short term trend channel is broken and the stock
reverses in direction of the intermediate term trend channel. In both
cases, the reversal is a better buy signal when it occurs in conjunction
with a bounce off the bottom of the longer term trend channel. Once a stock
has reversed its trend, I construct a new short term trend channel in the
direction of the longer term trend. I use this new Short Term Trend Channel
to set my targets and stops as I described last week if I entered a position
on the breakout of the old channel. If I missed entering the position at
the brekout, there are additional entry points every time the stock bounces
off the bottom of the new short term trend channel.
As you can see, using trend channels for signaling when to enter a
new position is straight forward and simple. The trick is how to
objectively and consistently construct the trend channels. For short term
up trend channels I use the Standard Deviation Channel built into MetaStock.
I start the channel immediately to the left of the lowest low in the data
being considered and end immediately to the right of the highest high in the
time frame. I set the deviation at 2 to determine the targets and at 1 to
determine the stops. I usually leave it at 1 for looking at the charts
since the stop is more important than the tartget. I extend the channel to
the right. Anytime a new high is hit, I'll drag the right end of the
channel immediately to the right of that high. After a few months with at
least two good reactions, I switch to Trader Vic type trend lines to
construct my short term channels. I only use Trader Vic type trend lines
for intermediate and long term channels. I like the Trader Vic methodology
much better than using a standard deviation channel, but it gives many more
false signals than standard deviation channels do for very short term
channels without any major reactions in the data.
For a Trader Vic up trend line, start with the lowest low in the time
frame being considered. Draw a line from that low to a low before the
highest high in the time frame such that the line doesn't pass through any
data. It's important that you don't draw the line through any data or to a
low that is past the highest high in the timeframe. A down trend line is
just the mirror image using the highs in the time frame. To construct the
up trend channel, extend the line to the right, then draw a parallel line
through the most extreme high in the time frame such that the line doesn't
intersect any other data points. This is easy with MetaStock. You can hold
the CTRL key down, then hold the left mouse key down once you are on the
original line and drag a parallel line to where ever you want it. You can
do the down trend channels in a similar manner. Horizontal channels are the
easiest. Just drop a horizontal line on the highest high and lowest low in
the time frame. My final touch is to change the line color and style: blue
and dashed for short term channels; red and dashed for intermediate term
channels; and magenta and dashed for long term channels.
That's all there is to it, what do you think? Does it make sense?
Jim
-------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: Metastock <metastock@xxxxxxxxxxxxx>
Subject: Building Blocks - Direction and Timing
Date: Sunday, December 20, 1998 2:19 PM
All,
This week I want to complete my discussion of trend channels by telling
how I use them to determine if it is OK to enter the market and what
direction, long or short, I should enter. To do this, I go back to the old
thesis that the trend is your friend. I used to always have long and short
positions simultaneously and would weight the ratio from even for flat
markets up to 3 to 1 in the direction of the trend for trending markets.
However, over time, I found that I was better suited to just trading with
the trend.
My first rule is that I always trade in the direction of the
intermediate term trend. When the intermediate term trend is up, I only
open long positions and when its down, I only open short positions. I use
the Dow Jones Industrial Average as my indicator for large cap, nifty fifty
type stocks, I use the S&P 100 as a confirmation for the DJI and the S&P
500 as an indication for mid to large caps. I use the NASD OTC index as my
indication for tech and INet stocks. I use the Russel 2000 as my indicator
for small cap stocks. I feel better when the intermediate term trends of
all are going in the same direction, but can and sometimes do limit my
trading to stocks represented by one index. For the last couple of months
I've been in the process of changing my portfolio from all large cap stocks
to a mix of large and small cap stocks as the RUT broke out of its
Intermediate Term Down Trend in mid Oct and gave a Trader Vic type trend
reversal signal in early November. I'm currently experimenting with
applying trend channel analysis to sector charts and am limiting my stock
selections to strong sectors only, but that's another story.
I've used this rule of trading only in the direction of the
intermediate term trend for quite some time now. I've recently experimented
with some fine tuning, that I'm in the process of adopting. I use Short
Term Trend Channels within the Intermediate Term Trend Channel for further
guidance. I'll describe what I do for long positions within an Intermediate
Term Up Trend Channel (ITUTC). I won't describe short positions in
Intermediate Term Down Trend Channel, but the strategy is just the mirror
image.
If we have a Short Term Down Trend Channel (STDTC) within the ITUTC I
won't enter any new positions and will just sit on the cash when I close any
positions that have hit targets or stops. If the stock breaks out of the
STDTC I'll start entering new long positions at the rate of one per week.
If a Short Term Up Trend Channel (STUTC) is formed (confirmed by a Trader
Vic type trend reversal signal) in the bottom half of the ITUTC I'll enter
new long positions rapidly until my cash is all committed. As long as the
STUTC holds I'll enter new long positions when I have the cash. When the
STUTC is still in the bottom half of the ITUTC, I'll replace a closed
position with a new position on the day I close the position. When the
STUTC is in the top half of the ITUTC, I'll slow down on entering new
positions and build cash by only entering one new position per week.
Hopefully, that way I'll be fully committed to long positions for most of
the short term up trends and mostly cash for most of the short term down
trends. Right now I only exit positions when my targets or stops are hit as
I described last week. An option I'm considering, but haven't adopted yet,
is to close all long positions associated with a particular index when the
STUTC is broken in that index. I'm in the process of looking back over my
trades for the last few years to see if this option makes sense. When the
ITUTC is broken, I start opening short positions using the mirror image of
the ITUTC strategy.
That's about it, any thoughts or suggestions.
JimG
--------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: Metastock <metastock@xxxxxxxxxxxxx>
Subject: Building Blocks - Money Management
Date: Sunday, December 27, 1998 11:18 AM
All
Money Management was the last thing I learned as I came to understand
the stock market and investment, but, of all the building blocks, it is
probably the most important. Money management is nothing more than risk
management and, if done properly, should help let you survive the rough
spots with enough money left to take advantage of the good times. It's not
complicated, at least the way I do it <G>, and is easy to do.
The first thing you have to do minimize risk is to only enter position
when the odds of winning are stacked in your favor. I discussed how I do
that last week with my post on the "Direction and Timing" building block.
In other words, only enter when the shorter term trend is running in the
direction of the longer term trend and when it isn't, stay out. The next
thing you have to do is to only select from stocks that have the
characteristics that represented winners in the past. I discussed that a
few weeks ago in my "Narrowing the Universe" building block post. The final
thing you have to do is to decide how much money to risk on each position.
In fact, some people say that this last part is their definition of money
management.
Before I get into specifics on how much money to risk on each position,
I want to touch on my general philosophy I believe in diversifying to
minimize risk, but I don't believe that more is better. In general, I think
5 to 10 positions mostly in different well performing industry groups is
enough. If you over diversify you are going to guarantee average
performance and that's not what I want. If I'm lucky enough to get a 200%
gainer like I did with AOL, I want it to make a meaningful impact on my
overall portfolio. In other words, I think its better to put all my eggs in
a few baskets and watch those baskets carefully, then to use so many baskets
that I can't keep track of them and my performance suffers.
For my actual money management I observe the following rules:
1. Each position initially represents 10 to 20% of my portfolio
although I may go less than 10% for small cap Christmas Special type stocks.
2. I won't risk more than 3 to 5% of my total portfolio value on
any one position and I'm usually under 3%. This risk is defined as the
maximum loss possible for the position. That's based on where my initial
stop is placed.
3. No more than 2 positions in any one industry group.
That's it, I told you it was simple <G>. However, it is a very
powerful concept. It gets you to thinking about the risk involved in each
and every position and makes sure that, if followed, you will have enough
resources to survive a bad streak. If you are more risk adverse and less
profit oriented than I am, you can decrease the position size and the amount
at risk. If you can stand more risk, then you can increase the position
size and the amount of risk, but I wouldn't go too far in that direction
since my model is already pretty risk tolerant. The important thing is to
recognize the need for a money management system and get one that you are
comfortable with so you can follow it.
Any thoughts or comments?
JimG
------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: Metastock <metastock@xxxxxxxxxxxxx>
Subject: Building Blocks - Narrowing the Universe of Potential Stocks
Date: Sunday, November 22, 1998 3:10 PM
All,
I'd like to start a discussion on how to narrow the universe of stocks
to a few potential trading candidates that have certain characteristics that
have resulted in successful trades in the past. I'll explain what I do and
hope you chime in with comments on additional suggestions or comments on why
you believe what I'm doing is wrong.
First I believe that there are many different selection techniques that
work and there are times when one technique will work better than others.
For example, large cap momentum selection searches have worked exceptionally
well for the last three years and small cap value techniques have not.
However, if you look back in history, that's very unusual because small cap
value techniques have worked better on average over the last fifty years. I
also believe that the mirror image of a search for long candidates isn't
necessarily a good search for short candidates, but I don't want to get into
that today. I test the market indices to decide if my new positions should
be long or short and my new positions have been long positions for some time
now, but that is also the subject of a future post <G>. To keep this post
fairly short, I want to concentrate on searches for long stock candidates
only today.
I use several different searches to select the few (less than 200)
stocks that I keep in my MetaStock database. My searches are only to find
stocks to add to my database and I only add a few each week. (I also prune
my MetaStock database periodically.) I look at the results of the searches
and use my 20/20 eyeballs for my final decision. I used to use Telescan for
this by recently dropped them due to cost and bad data. I'm now using QP2
for my daily and historical data. It does have a built in search capability
using a combination of fundamental and technical data. However, I'm just
learning its programming language and it doesn't have a lot of criteria to
search on. Still, I believe it has great potential and understand that they
may add additional fundamental data after the first of the year. In the
mean time I'm using Microsoft Investor and eSchwab search capabilities.
What I'd like to do here, is not give the search formulas, but rather
discuss the criteria I use for the various searches. I'll be glad to share
the QP2 searches after I finish them. I've found that for fundamental
criteria, the price/sales ratio by itself works best for me. I can enhance
it's performance by also using debt/equity, and various earning and revenue
growth criteria. Today I'd like to describe a momentum breakout search
CANSLIM that I use for both large and small cap stocks; a bottom fishing
search BotFish; a value growth search,ValuGro that can be used for both
large and small cap stocks; and a small cap search, SmalCap. You will see
my favorite criteria used in most of them.
CANSLIM is a momentum search that I've been using for a long time that
is based on parts of the CANSLIM strategy. What it looks for is stocks that
are trading at a new 52 week high on high volume and meets several other
conditions. In all my searches I begin by limiting the stock to a price
above a minimum and below a maximum. For CANSLIM that's 5 and 144. Then I
ask the search to list the 52 week high and the 52 week low for my info on
making a final decision on adding the stock or not. The search continues by
limiting the selection to those stocks which are in the top 20% considering
earnings per share growth and the top 20% considering price growth over the
last year. Then I ask for group rank, fundamental rank, 30 day average
Volume, and 3/30 day Volume to be as high as possible. This doesn't limit
the selection, but helps rank the selection and I only take the top 20. I
also ask for analyst rank to be as good as possible, institutional holding
to be as low as possible, market cap be as low as possible, and insider
trading to be as high as possible (buying). Finally I ask that the stock
has set a new 52 week high within the last 5 days.
BotFish is a search for stocks that have been beaten down and look like
they are bottoming. It looks for stocks that are trading at 50% or more
below their 52 week high but still have decent fundamentals and are showing
signs of recovering. I again start by asking for a price between 5 and 21.
I also ask it to list the 52 week high and low. Then I ask that yesterday's
close be lower than 1/2 the 52 week high. That makes sure that we are
looking at only beaten down stocks. To insure good value I ask that the
Price/sale ratio be less than 1 although I sometimes raise that to 2.1. I
may also use the same criteria for price/book if that's available. I
further ask that the price/sales be as low as possible. I may or may not
use a debt/equity below 1 requirement. I then ask that the annual revenue
growth be greater than 13% and that it also be as high as possible. I may
or may not use the same criteria on earnings growth depending on how much
that limits my results. Finally I ask that the 3 month relative strength be
as high as possible to show early signs of turning up.
ValuGro looks for stocks that are growing strongly yet are still good
values as shown by low price/sales ratios. It starts off asking for a
close greater than 3 but then asks for a price as low as possible. I also
ask it to list the 52 week high and low. I then ask for a price to sales
ratio that is well below the industry average. This way I get the benefit
of a relative low price/sales but don't eliminate stocks in groups that have
higher price/sales ratios. I then ask that the price/sales be as low as
possible. I then ask that the debt/equity be below 1. I ask for a market
cap above 250,000,000 to eliminate micro caps. I eliminate stocks whose
price dropped in the last quarter. I then ask that the quarterly price
change, the annual revenue and earnings growth be as high as possible.
SmalCap looks for small cap stocks that are showing exceptional
earnings growth but are undervalued. It starts by displaying the previous
days close and the 52 week high and low. It asks for a market cap less than
500,000,000. It asks that the 3 month relative strength be higher than the
6 month relative strength. It asks for annual EPS growth greater than 30%
and projected growth greater than 30%. It asks for price/sales less than 1.
Finally I display P/E, ROE, and Debt/Equity.
I run each of these searches weekly. I then look at charts of the
resulting lists on QP2 and decide if I'm interesting in adding any to my
MetaStock database. If they look good I'll export the historical data to my
MetaStock database and run my MetaStock system tests on them. If they don't
return better than a 100% profit on one of my system tests, I'll delete them
form my MetaStock database. The point to remember is that these searches
are not a stock selection system by themselves, they are merely the first
building block in my stock selection system.
Any comments or suggestions?
JimG
------------------------
From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Subject: Re: Stock Trading Building Blocks
Date: Sunday, November 15, 1998 11:15 AM
Mike,
That's one way. Actually I use several different types of tests,
filters, or searches (whatever you want to call them <G>) including a
CANSLIM breakout model. I switch around depending on what strategy I
think is working at the time, right now for example I'm using both a
large cap momentum and a small cap Christmas Special type search. I
used to do my searches using Telescan searches which work fine, but
the service was on the expensive side. I dropped Telescan several
weeks ago and switched to QP2 for my quotes. QP2 also has a search
capability, but I'm just coming up to speed learning how to program
them. Right now I'm using both Schwab's search capability which is
free for active traders and Microsoft Investor's Finder search
capability. What I try to do is use a combination of fundamental and
technical criteria to narrow the list of stocks that I might want to
invest in. For my Christmas Special type stocks I use two searches, a
BotFish and a SmalCap search. For momentum type Breakouts I use a
CANSLIM, a FlarOut, and a ValuGro search. I could give the actual
search code, but that wouldn't make much since if you don't use
Finder. Instead I'll just describe BotFish below in general terms.
If anyone is interested, I can also describe the others. When I get
them changed to QP2 code and get them working, I'll be glad to share
them with the other QP2 users out there.
The bottom fishing (BotFish) search begins by eliminating stocks
that trade below a certain price and above a certain price. If I'm
looking at small caps only I usually set that to 3 and 21. It then
eliminates all stocks that are trading above 1/2 their 55 week high.
I'm looking for fallen angels here. To get good fundamentals it then
eliminates stocks that have a price/book above 2.1, a price/sales
above 1, debt/equity greater than 1, annual revenue growth less than
13%, and annual earnings growth less than 13%. Finally to make sure
that there has been an up turn I demand that the three month relative
strength is greater than the six month relative strength. To rank the
remanding stocks I ask for the price.sales to be as low as possible,
the revenue growth to be as high as possible, and the 3 month relative
strength to be as high as possible. I can and do play with the
numerical values from time to time after looking at the results of my
searches. Over time, I've come to believe that low price/sales couple
with no debt is the best basic fundamental search criteria. Adding in
earnings and revenue growth then helps with the final cuts.
Yell if anyone wants me to describe the other searches.
JimG
-----Original Message-----
From: lorenab@xxxxxxx <lorenab@xxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Date: Sunday, January 24, 1999 1:16 PM
Subject: Re: Weekly Pick
>Thanks Jim. I don't believe the building block posts managed to make it
>through--but found your summary very helpful.
>
>Lorena
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