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Keith's Stock Trader

I'm Keith Fitschen. I've found that the best way to trade stocks is to buy weakness and to sell strength. Of course, selling stength in a raging bull market will lead to heavy losses, as will buying weakness in a bear market. But, since it's easier to trade short-term than to predict the market long-term, I've found that I can profitably buy weakness and sell strength in a normal sideways market, a bull market, or a bear market, as long as I keep the long and short exposure equal, in dollar terms. When the market is moving sideways, I usually make money on both the longs and shorts. When the market is moving up, I generally make more on the longs than I lose on the shorts. And when the market is moving down, I generally make more on the shorts than I lose on the longs.

My stock trade system is available by subscription only. Each day, 20 new long-entry and short-sale-entry stocks will be presented to subscribers. The following material describes the methodology, past profitablity, and how to trade the strategy.

Stock Trade System Methodology

The stock trade system methodology is the same for both longs and shorts. At the end of each trading day I find a number of weak stocks that I will buy "at the market" on the next open, and I find a number of strong stocks to be sold (Short Sale) on the next open. These longs and shorts are entered "market on open" the next morning. Two days later the trades are exited "Market on Open". All orders are placed well before the market opens. Once the orders are placed, you're done for the day -- no monitoring, new orders, etc.

This two-day cycle is started each day. So after the first day, you're placing entry orders and exit orders for both longs and shorts each day.

Stock Trade System: Selecting the Long and Short Trades

Stocks must meet two criteria for trade consideration: first, the closing price must be at, or above 5, and second, recent trading liquidity must be above $20,000,000. I define trading liquidity as the average volume over the last five days multiplied by the average closing price over the last five days. Generally, about 1,500 stocks meet this criteria each day. All of these candidates are then "scored". In the scoring process, each stock receives a number for each of the following characterisitics:

Past Profitability (Long or Short)

Current Volatility

Current Strength or Weakness

Today's Bar Type (relationship of open, high, low, and close)

Correlation to the market

The number for each category is based on the average result of 100s of thousands of past trades that had the same profitability, volatility, etc. setup.

Those stocks with the highest total score are tomorrow's trades.

Stock Trade System: Trading the Strategy

The results shown in this writeup assume the use of 100 percent margin. If your account size is $20,000, the strategy assumes you will maintain long positions totaling $20,000 and short positions totaling $20,000. I recommend you enter half the total number of long and short positions each day. If you will be trading a total of 4 longs and 4 shorts on a $20,000 account using a $5,000 position size each trade, just put 2 new longs and 2 new shorts on each day.

I recommend you use a minimum $5,000 "betsize" on each position. The daily signals will show how many shares to buy or sell to equal a $5,000 position. Smaller positions are not recommended because commission costs will eat into profits.

Stock Trade System: Past Profitability

The following table shows the annual long-only, short-only, and long/short results from the year 2000 to date when all 20 long and/or short-sale stocks are traded each day. Profits are compounded by making the betsize on each trade proporionally larger as the account grows. For the long-only, and short-only results, 100 percent margin WAS NOT used. In those cases, long or short positions were placed to total the account value, not twice account value. The yearly change for the S&P 500 cash index is shown for each year as a performance reference. These results contain a slippage/commission deduction that I consider realistic, if you trade with a discount broker like Interactive Brokers. Each trade has $0.015 deducted from the entry price to account for the entry market order, and $0.015 deducted from the exit price to account for the exit market order.

Keith's Stock Trader Annual Return
Year
Long-Only
Short-Only
Long and Short
S&P 500
2000
81
136
362
-10.1
2001
152
64
357
-13.0
2002
57
61
170
-23.4
2003
120
7
145
26.4
2004
90
19
132
9.0
2005
73
28
125
3.0
2006
46
18
77
9.1
2007
50
20
88
3.5
2008
11
153
241
-38.5
2009
75
-5
72
23.5
2010
37
1
43
12.8
2011
23
21
54
-0.0
2012
21
17
43
13.3
2013
51
-12
33
29.6
Average 63.4 37.7 138.7 3.2

The results show the benefits of this type of trading:

If only the long signals were taken, there were no losing years. The average long return per year was 63 percent which is outstanding when you consider the fact that the S&P was basically flat, on average, over that timeframe.

If only the short signals were taken, there were only two losing years. This despite the fact that in 9 out of the 14 years listed the S&P closed the year higher.

Trading both signals, there was never a losing year. The worst return was 33 percent in 2013, a return most hedge funds would covet.

The average return trading both signals was 139 percent, and in 2008, when the US suffered one of the worst market meltdowns ever, the return was 241 percent.

On the risk side of things, results are every bit as impressive. The largest drawdown over the entrie period was 22.6 percent in 2008. When the largest 20 drawdowns over the period are averaged, the result is 13.6 percent. I use these metrics in my trading as "expectations". I expect to see about 14 percent of drawdown in the next 6 months to a year, but I could see as much as 22.6, or greater.

These results were generated using backadjusted continuous stock contracts that properly account for splits and dividends. A slippage/commission deduction of $0.03 per share was taken from each trade. The following CFTC notice on hypothetical results should be noted.

NOTICE: "HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Practical Considerations in Trading the Strategy

In order to fully capitalize on the strategy, transaction costs need to be low. I define transaction costs as slippage and commission. Regarding commission, there are a number of discount brokers with excellent stock comission rates. Interactive Brokers is one. I've traded this strategy, and variations of it, for a number of years and have had little problem. They generally can put on all the short sales, and their user interface (The Traders Workstation, TWS) is excellent for placing the trades and monitoring your account.

Regarding slippage, I generally see about one penny of slippage on market orders. The reason that slippage is so small is because of the $20,000,000 liquidity requirement the strategy uses. These stocks have huge volume. Since all market orders occur on the open, the most liquid time of the day, it is easy to measure the slippage by comparing your live fill with the print open.

For those trading IRAs, or other segregated accounts, that don't allow shorting, you can trade the long-only strategy by just trading from the long stock recommendations.

Stock Trade System: What you See Each Day

Subscribers will see the new signals each day, as well as a trade summary for the previous three days. The trade summary for yesterday's trades will show the open equity profit/loss for each trade based on yesterday's close. The trade summary for two days ago will show the trades that need to be exited "at the market" today. The trade summary for three days ago will show the closed out profit/loss of each trade entered three days ago. The following table shows the type of information presented each day. A similar table is shown each day for the short-sale trades.

Stock Trader Long Trades
Based on Closing Data for 20111108
Symbol

Entry Date

Entry Price

Exit Date

Exit Price

Profit on $5,000 Position
CECO 20111104 7.48 20111108 8.34 $583.07
LVLT 20111104 22.33 20111108 21.38 -$213.75
....          
....          
Symbol

Entry Date

Entry Price

Order

Last Close

Profit on $5,000 Position

CECO 20111107 7.96 Exit at Market 8.34 $237.87
WCRX 20111107 17.36 Exit at Market 18.13 -$180.64
....          
....          
Symbol Entry Date Entry Price Last Date Last Close Profit on $5,000 Position
VRTX 20111108 32.68 20111108 30.45 -$334.51
SCSS 20111108 20.66 20111108 20.78 $29.40
....          
....          
Symbol Order Number of Shares for $5,000      
TRGT Buy at Market 657      
VRTX Buy at Market 164      
....          
....          

The table shows two of the long trades that were entered on Nov. 4, 2011. Both longs were closed on the open of Nov. 8, 2011, one for a profit and one for a loss

The table shows two of the long trades that were entered on Nov. 7, 2011. As of the close on Nov. 8th, one long was in profit, and one in loss. Both longs are to be exited at the open of trading.

Two of the longs entered on Nov. 8th shown. There are no orders to be placed for those positions today.

Lastly, two of the long entries for today are shown along with the number of shares of each that should be bought for a $5,000 position. That number is based on the latest closing price. If you desire to be more precise, you can do your own calculation based on the pre-open price.

Note that CECO is bought on both the first and second days of trading shown. Two positions in the same symbol occurs relatively often. It usually happens when the symbol loses money on the first day.

Stock Trade System: Price

The price to lease the signals is $149 a month. You can quit at any time. Additionally, there is a one month free trial. You can sign up for the trial on the home page.

 
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