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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, in a raging bull market, selling stength 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. On day two of those trades, a limit order is placed above the entry price for the long trades to form a "long profit target", and a limit order is placed below the entry price of the short trades to form a "short profit target". On day three of those trades, any open positions (those that didn't hit their profit targets) are closed out "at the market" on the 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 three-day cycle is started each day, so on the day you're placing the profit targets for the trades entered yesterday, you are also entering new trades to start today's cycle, and exiting the trades that remain from the cycle started two days ago.

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 10, 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. Since you will be entering new positions each day, this presents a bit of a problem because some positions will come off during the day when they hit the profit target.

To be conservative and avoid a margin call, 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 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.

Keith's Stock Trader Annual Return
Year
Long-Only
Short-Only
Long and Short
S&P 500
2000
121
34
201
-10.1
2001
55
79
181
-13.0
2002
26
59
109
-23.4
2003
95
-11
77
26.4
2004
46
2
46
9.0
2005
32
-1
31
3.0
2006
36
2
36
9.1
2007
9
12
24
3.5
2008
-26
160
97
-38.5
Nov 2009
50
14
76
17.0
Average
44.4
35.0
87.8
-1.7

The results show the benefits of this type of trading:

If only the long signals were taken, there was only one losing year, 2008. And the losses for that year were much less than the S&P loss for the year. This despite the fact that from 2000 til September of 2009, the market averaged a loss of almost 2 percent a year.

If only the short signals were taken, there were only two losing years. This despite the fact that in 6 out of the 10 years listed the S&P closed the year higher.

Trading both signals, there was never a losing year. The worst return was 24 percent in 2007, a return most hedge funds would covet.

The average return trading both signals was 87.8 percent, and in 2008 when the US suffered one of the worst market crashes ever, the return was 97 percent.

These results were generated using backadjusted continuous stock contracts that properly account for splits and dividends. No slippage or commission deduction was made. The following CFTC notice on hypothetical results should be noted.

Stock Trade System

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 profit target limit orders that need to be placed today, as well as 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, as well as an accounting of the profitabilty of the closed trades that hit profit targets yesterday. 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.

Entry
Date

Symbol
(L or S)

Entry
Price/Order
Exit
Date/Order
Exit
Price/Last
Close
Closed/Open
Profit
20091118
RAH Long
54.15
20091120 54.57
38.64
20091118
PSQ Long
45.17
20091120 46.29
123.19
20091118
AES Short
13.25
20091119 12.86
146.21
20091118
RAH Short
54.15
20091120 54.57
-38.65
20091119
BKD Long
15.98
Exit on Open 16.0
6.23
20091119
CRI Long
22.05
Exit on Open 21.84
-47.47
20091119
SOHU Short
56.91
20091120 53.92
259.68
20091119
MAA Short
46.17
Exit on Open 45.52
70.19
20091120
HK Long
20.87
Sell at 22.85 better 21.09
52.57
20091120
HDB Long
132.38
Sell at 145.69 or better 134.07
64.38
20091120
VMED Short
16.65
Buy at 15.76 or better 16.9
75
20091120
ED Short
41.7
Buy at 41.26 or better 41.9
-23.80
Today

QGEN Long

Buy 232 at Market
N/A N/A
N/A
Today
ROST Long
Buy 114 at Market
N/A N/A
N/A
Today
PRSP Short
Sell 141 at Market
N/A N/A
N/A
Today
COV Short
Sell 120 at Market
N/A N/A
N/A

The table shows two long and two short trades that were entered on Nov. 18, 2009. Both longs were closed for a profit on the open two days later. The short position in AES hit it's profit target on the day after entry and netted a profit of $146.21. The other short position entered on the 18th, RAH, was closed out at the market two days after entry for a loss of $38.65.

The table shows two long and two short trades that were entered on Nov. 19, 2009. Both longs failed to hit their profit targets so they will be closed out on today's open. One of the shorts, SOHU, hit it's profit target yesterday and netted a profit of $259.68. The other will be closed out today on the open with a market order.

The two longs and two shorts entered on Nov. 20, 2009 will have profit target limit orders entered today at the listed prices. And two long entries and two short entries are shown for today.

Stock Trade System: Price

The price to lease the signals is $99 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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