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Hello rvalue1. I haven't heard from you in awhile. I hope you're still
prospering.
Here's a link that explains the difference between quantitative
analysis and fundamental analysis. When I'm speaking of quants, I'm
not talking about the people who do quantitative analysis but rather
the use of quantitative analysis to rank stocks.
http://www.fool.com/school/basics/basics06.htm
What Works on Wall Street is O'Shaughnessy's book on combinations of
fundamentals and how they impact future stock prices. There are also a
few tests in the book that involve mixes of quant numbers (QA) and
fundamentals (FA).
There are several other books, papers and long term studies that have
looked at how various FA and QA factors impact stocks. There are
similar to MS that do FA and QA analysis. Reuters has powerscreener
for example. There are also back testers specific to this kind of
analysis.
I have used several of these programs over the years. They are
generally very expensive and have a long learning curve, so I don't
recommend them.
In my experience if someone wants to trade mechanically using FA and
QA, then spending a lot of time finding the best mix is important.
Motley Fool has a forum dedicated to mechanical trading based on FA
and QA. There are three or four memebers of that group who are some of
the best FA and QA traders around.
However, the best mix I've come across and have ever tested is to use
a group of stocks that have already been screened using FA and QA and
that are available from a strong group that has been doing this for
many years with a published very long term track record. Value Line,
Ford Equity Research, IBD, S&P Platinum or Neural list and a few
others like AAII.
It's not important to pick the provider with the highest returns from
their group. Each of the lists has certain characteristics that make
it easier or harder to trade. For example the IBD list is more
volatile with lower cap, lower volume stocks on it than the list from
Value Line. The Ford list contains only 20 stocks where Value Line and
IBD have 100 on them.
Basically once someone settles on a list that fits what they're going
to be doing, then the application of some very simple TA improves the
returns from the list. Using TA on these stocks is more effective than
using TA on stocks from the entire market for several reasons.
Many thousands of people follow some of the lists so there is a lot of
buying activity in those stocks. In addition, the stocks have strong
FA and QA attributes so the same stocks often appear on analysts
recommend lists and in other forums stock buyers use to make their buy
decisions. This can be good for momentum.
In addition, these stocks have strong business fundamentals behind
them so they have a reason to go up.
The bottom line is a little TA goes along way on these lists. The
lists provide the easiest population of stocks to trade which means
that the average trader is going to be more successful sticking to
list. Like all trading there has to be a strategy, a set of rules and
the discipline to stick to the rules. The list don't get rid of the
need for those things. However, some very simple and limited use of TA
makes the charts easy to read and the buying and selling decisions
much more obvious.
Guru's and guru want-to-be who have products to sell promote the idea
of picking huge stocks. You never hear a word about consistency.
Rarely is the subject of std deviation in returns mentioned, and long
term, transparent track records are non-existent. There is a reason
for that.
With QA and FA, the long term track records of the good firms are
there. Like everything else, the know-it-alls and
bitch-about-everything if it isn't my idea will criticize the track
records because they didn't include slippage or whatever. It doesn't
matter. Those are trivial and irrelevant arguements unless someone is
going to buy and sell the entire list on a purely mechanical basis.
The comparisons between lists are relative only, and viewing a few
list of past picks on a chart will tell you if you have a reasonable
chance of trading the stocks the way I've mentioned.
The lists I've included in this post are all tradable. I've tested the
Value Line list extensively and well as a couple of others.
People wanting to use a combination of QA, FA and TA to make money in
stocks shouldn't try to reinvent the wheel and run millions of tests
using various testers or look for the perfect program that combines
all of them together. In the end it will take too much time, too much
money and be too difficult to master for most.
Keep it simple. Use what is out there and is proven.
PS I wonder why Equis didn't publish any back test results on the RMO
system that is sweeping the world of trading.
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