March 25, 2017: New comments S&P500
Want to know more about "Capturing Profit with Technical Analysis"?
Twice semi-finalist "Favorite Article" in the S&C 2015 Readers' Choice Award. Thank You!
AXIOM business books awards, bronze medal for my book! Thank You!
As a trend following system, BBS profits most from stocks that make larger moves over longer periods. This stock selection is a manual process since we are anyway just looking at a limited number of stocks. If you end up with more stocks than you need for trading, just look at the daily percentage move and keep those that on average show the most and highest % values, with this formula:
We are looking for stocks that make large price moves over longer periods while avoiding stocks that have a history of:
For this we will visually inspect historical price data. Here we are looking at charts until half 2004. First we look with a line chart at the long term. We want to see a steady moving price making large moves like in the figure below with the chart of AW.
Next we will look with a bar chart at the shorter term. Here we pay attention to intraday and daily volatility and absence of large surprise moves.
The next Figure shows the chart of United States Steel as an example. Here you can see that price makes larger short term moves, without extremes in volatility and without surprises. Gaps and high intraday volatility are in the direction of the short term trend and as such not a surprise.
Let’s have a look at some example charts with the kind of stocks we do NOT want to use with BBS. In the following figure an example of a chart with a long term flat price move.
In the figure below another stock we do NOT want to use because of very extreme price moves in short time periods.
The chart of Intel in the figure below shows nice steady price moves, but looking at the price axis from year to year you will notice most of the time not enough price change to make profits.
Looking at a short time daily bar chart we get a better idea how price acts from day to day. In the next figure we see typically a chart with not enough daily trading volume, showing large differences in daily volatility.
The chart of the figure below shows nice larger moves even on short term level, however there are too many single days with extreme surprise volatility. That makes it very difficult to use initial or trailing stop methods.
A good example to be used with the BBS system is AMD. The long term chart below shows nice large long term price moves with no surprises.
A finally a sample out of the AMD short term chart showing the kind of behavior and moves we like for BBS (or any trend following system).