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Fundamental/Technical Hybrid Trading Strategy

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tech/a

tech/a

No Ordinary Duck
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I noticed in Dymocks the best stocks for 2014 book.

Had a browse and the criteria for inclusion seemed reasonable.
Certainly save people a lot of time working out the strength of
a number of companies. They make quite a point of saying that
while these may not do as well as a miner who hits pay dirt they
"Should" Represent a lower risk and possibly better return for those
with a view of SMSF's. They also point out that there is no consideration
of the chart so some are at highs/some at lows/some wobbling around.

It got me thinking.

If you were to use these stocks as your trading universe and then applied
technical analysis to them for entry and exit/Risk management and
parcel sizing---would this not be a good start
for a trading method?

I've never seen a combined/colaborated effort before!

Thoughts.
 
Wasn't the convergence the jist of the zipzap discussion - "Trading System by Andrew Gibbs - Member of Larry Williams Hall of Fame" a few weeks back ?

I wonder what happened to that ?
 
Caveroute said:
Wasn't the convergence the jist of the zipzap discussion - "Trading System by Andrew Gibbs - Member of Larry Williams Hall of Fame" a few weeks back ?

I wonder what happened to that ?
Click to expand...

Don't think so
Must have missed something
 
tech/a said:
...
Thoughts.
Click to expand...

I like it. I like it a lot!

Find a universe of choices.
Then limit it in some random way to get a galaxy.
And finally add some TA to get down to a solar system.

I feel some enthusiasm for the idea.
 
I like the idea of it, I try to use a little bit of TA to time my entries into any value/fundamental type purchases I make but my knowledge of TA is extremely minimal compared to others around here.

I wonder how you'd go by having a simple screener which eliminates most stocks and then just trade those left over how you'd go. You obviously wouldn't want to spend too much time on the fundamentals side as it would diminish the trading ability (i.e. looking at annual reports and calculating IV's and cash flows manually for each company to ensure they are fundamentals worthy can be highly time consuming).

I wonder how you'd go by running a screen say once a month as per the following:

Debt to Equity <40%
P/E <12
Market Cap >$100 mill
Return on Equity >10%
5 year EPS growth >5%
Last years Cashflow >0

The above is a rough version of what I use to scope down my list and then i delve further from there. I know people have issues with P/E as a value measure, Return on Equity etc etc. But I beleive this should be about getting a fundamental style list together quickly and then trading it.

Is that essentially what your talking about tech/a?
 
I was actually thinking of using all the stocks selected in Roth's Book as the universe.


Top stocks 2014 Screenshot - 4_12_2013 , 11_02_06 AM.jpg


Then Using T/A to enter and or exit.
Welcoming input from all Fundies and Techies.

I was also going to use a market stop as well.
Perhaps one which stops buying if "X" happens and sells the total portfolio
if "Y" happens.

Position sizing---risk management and portfolio heat---along with issues like opportunity cost
could be addressed.

My view was to use it as a way to help SMSF mid to longer term Traders/Investors
like myself.
Just made sense to a Duck!

Could be worth while??
 
To my wife and sweet heart – May they never meet.

That’s my view on mixing TA & FA. Simply because you cannot have two masters.

You have to know which one you are faithful to when they have conflicting demands.

If you use FA only for the universe and TA for everything else you can probably keep yourself out of trouble with conflicting signals.

Personally I think you want stocks that are hard to value and highly leveraged operationally and financially for a trading universe. The price discovery volatility gives much more opportunity to trade and faster trends.

Things that can be reasonable well valued will tend to have less volatility trend at slower annual gains (more in line with the business growth rates) the offsetting potential will be longer duration trends.

Don’t know the Roth book so don’t know if it is a reasonable universe from a Fundamental perspective.

Probably better generating your own universe – actually a number of different universes and answering the question is it the universe selection or the trading overlay that creates the return. If both aspects have edges do they compliment or conflict with each other. As enticing as the idea of combining the two sounds I have always found in application that the edges subtract.

All from me I’m heading off travelling for a while.

Best of luck (sincerely) with it
 
To my wife and sweet heart – May they never meet.
Click to expand...

Lol...Well said Craft...


Personally I think you want stocks that are hard to value and highly leveraged operationally and financially for a trading universe. The price discovery volatility gives much more opportunity to trade and faster trends.
Click to expand...

The 20%Flipper works better on the Russel 3000 than the S&P 500....Same thing?
 
Yes I can see the view.

Ill post the conditions that are met by the writer for the universe later.
There are quite a number of them. (I bought the book).
 
I think a fundamental/technical hybrid approach might suite itself to swing trading. I generally limit myself to the Lincoln stock doctor universe of stocks. In fact how I heard about Lincoln was from reading Alan Hull's "ActVest" system where he suggests using either Roth's top 100 or Lincloln's star stock as the universe. Hull's system is basically a swing trading system with a position sizing method and an index filter (using both the S&P 500 and the All Ords I think).

What are the merits of this type of swing trading in a FA selected universe?

- Still an opportunity for generating income (handy if you can make use of franking credits) from good yielding stocks.
- Position sizing.
- Stop losses.
- Positions can remain open for years (examples, CBA, TLS since 2011)- lower churn.

I believe this type of system also suites working with weekly charts/weekly decision making which is handy for people like me who don't want to live a life of looking at the market and making decisions daily. Stan Wienstein's "how to profit in bull and bear markets" also extolls a weekly chart system for this type of approach.

I think there are a couple of merits of choosing a universe of stocks base on FA filtering:

- Insolvency risk. Eliminate companies with a higher risk of going bust.
- Strong balance sheets - lowers the risk of the company needing to dilute through capital raisings in future.
- Although past performance is not a guarantee of future earnings, good earnings growth from a base of good ROE over recent periods should help identify companies with decent chances of growth.
 
Tinhat.

Yes I agree with all of your post and see a weekly method as very interesting.
I particularly like this aspect.
 
As an example of what Craft was saying, or perhaps an interpretation of it, small cap stocks perform better in a bullish market than do large caps. So for interest sake i was going to post a couple of charts, one of the 20% Flipper (the T/A portion) tested on the Russel 3000 from 2009 until June 2013, clearly bull market. The second chart was of the same parameters except the universe had changed and we're trading large caps....There was a huge difference in performance (RAR of 62% vs 21%)

But instead of posting those charts and ending up off topic trying to explain that exercise perhaps Tech/A could suggest some testing that he would like to see using the Flipper (an example of a T/A component) on various universes....That way we can stay on the right course. I thought this may add something to the discussion ... if not just say the word and i'll leave it to y'all...
 
tech/a said:
Tinhat.

Yes I agree with all of your post and see a weekly method as very interesting.
I particularly like this aspect.
Click to expand...

Interesting, i tested the Flipper over 13 years of weekly data on both the Russel 3000 and the S&P 500 and the S&P outperformed the Russel..
 
Due to the UNDERWHELMING sentiment to my pondering
I have decided to set up a weekly trading method and trade it
to see if a combination of Tech analysis and fundamentals can
out perform the market.

I have selected a weekly time frame as this will be less time consuming to manage.
As a great deal of my time will be devoted to whipping Can oz in the futures thread.

My top secret selection and culling method currently has these stocks of 98 stocks
selected by Roth as technical potential trades.
Of these a few have triggered and are open trades.
If and when others trigger Ill post them up.

I have a few more to mark up and will do so when I have time.
Starting Capital $100000.
Risk 1-2% each trade.
Can pyramid same trades

Click to expand

2014 1.gif

2014 2.gif

2014 3.gif

2014 5.gif
 
Tech/a have you tried your own fundamental analysis before? The problem with this is the assumption that the book has selected fundamentally good stocks. The qualitative analysis is questionable. There is also no talk of intrinsic value. If you don't know the intrinsic value of a stock or at least an approximate you're going in blind. That being said, you arn't really going in blind if you're using technical analysis, you're just may not be selecting stocks that warren buffet would buy.

For example, I think SGH is overvalued on the face of things. I don't even need to get out a calculator to look at that and say "yea, that's pretty dam expensive" just eye balling the financial data. The reason for the premium is growth potential but you get no benefits of that unless you're going to buy it and hold it for the next decade.

If I won 18 million bucks on the lotto though I would probably stick a million in SGH though, read the annual reports, and wait for my return decades from now.
 
Valued said:
Tech/a have you tried your own fundamental analysis before? The problem with this is the assumption that the book has selected fundamentally good stocks. The qualitative analysis is questionable. There is also no talk of intrinsic value. If you don't know the intrinsic value of a stock or at least an approximate you're going in blind. That being said, you arn't really going in blind if you're using technical analysis, you're just may not be selecting stocks that warren buffet would buy.

For example, I think SGH is overvalued on the face of things. I don't even need to get out a calculator to look at that and say "yea, that's pretty dam expensive" just eye balling the financial data. The reason for the premium is growth potential but you get no benefits of that unless you're going to buy it and hold it for the next decade.
Click to expand...

I have no interest in Fundamentals.
Two Reasons
(1) I don't have the time or inclination to do the research.
(2) Ive seen enough conflicting opinion form "expert" Fundamental analysts to
question the validity of "Valuations" and their appropriateness with regard to
future stock price values given that these will and do change both for the positive
AND Negative withing the framework of the company and not seen for many
months.
Charts tend to reflect most before the books do.---In my experience.

Then and critically---it is questionable how to apply valuations into a trading strategy
which has a good chance of turning a profit.
Portfolio's/Trades in my view are more easily and definitively handled with the introduction of T/A.

Mind you Roth's suggestion for use of Technical analysis in his book is in my view woeful!

His criteria--right or wrong are.
(1) Stocks in top 500
(2) Must be publicly listed since 2008 and have 5 straight years of profits and dividends.
(3) All companies must return on equity ratio of 10% in their latest financial year.
(4) No Company should have a debt to Equity Ratio of greater than 70%
(5) Exclusions Managed funds/Foreign stocks listed on the exchange.

Then HIS opinion that the stocks in the Book are his best.
Im going with that and adding MY T/A.

SGH Technically looks to be at the end of a wave 3 and on the verge of a Pull back to then continue to a wave 5 So for me this is on watch not buy!--YET.
 
McLovin said:
So why use them?:confused:
Click to expand...

I personally dont.
But if you read post #1 ----
A lot do and a lot rely on others to do the analysis.

Rather than sit around and comment on everything
I thought the thread would be of interest to those who have often wondered
how they could trade tips technically.
Not everyone is like me and the thread is meant to generate an interest.

I could be wrong but isn't that what a forum is about---Ideas?
 
tech/a said:
His criteria--right or wrong are.
(1) Stocks in top 500
(2) Must be publicly listed since 2008 and have 5 straight years of profits and dividends.
(3) All companies must return on equity ratio of 10% in their latest financial year.
(4) No Company should have a debt to Equity Ratio of greater than 70%
(5) Exclusions Managed funds/Foreign stocks listed on the exchange.
Click to expand...

Hi tech,

FWIW, I've ran this criteria in my fundamental back test. I assumed no sell criteria - once stocks were bought, they were not sold.

The results were not good.

And I wouldn't expect them to be - fundamental value approach is about finding undervalued assets, not good assets, although that would be preferable.

The criteria above tries to find good companies, but without assessing value, it is worse than useless, IMHO.

That's my 2 cents.
 

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