What Equities to Use in My Basket?

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JohnTHill
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What Equities to Use in My Basket?

Post by JohnTHill » Thu Mar 12, 2009 1:51 pm

I have developed a few long term models that use a basket of equities and look promising. I have optimized them into a decent range without curve fitting them. This leaves me with a question. What equities should I use in the basket of securities that my model runs over to both back test and provide real trading orders when I am ready to get my feet wet with live capital?

I know I want liquid stocks of high volume and decent fundamentals at a minimum. Should I be using some sort of routine in Trading Blox (or even Trade Station for that matter and then put those stocks it returns into my real model) to calculate which stocks have the needed volatility without being to choppy and would make the best candidates for my basket? If so any pointers, code snippets, or URL’s that could send me in the right direction to get me started would be greatly appreciated. Thank you.

John

sluggo
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Re: What Equities to Use in My Basket?

Post by sluggo » Thu Mar 12, 2009 3:42 pm

Warning: remarks below were written by a futures trader, someone with very little experience and even less expertise, trading stocks.

Maybe the basket with the smallest possible amount of 20-20 Hindsight, is "all stocks". Rather than using rules to select which stocks to permanently exclude or include in your portfolio, why not move those rules into your trading system? And then why not apply your system to "all stocks"? For example, suppose your entry-and-exit system uses a Zippity_Indicator as follows:

Code: Select all

If (No Position in this stock) and (Zippity_Indicator > 100)
Then (Enter Long on Tomorrow's Open)

If (Long Position in this stock) and (Zippity_Indicator < 0)
Then (Exit Long on Tomorrow's Open)

If (No Position in this stock) and (Zippity_Indicator < -100)
Then (Enter Short on Tomorrow's Open)

If (Short Position in this stock) and (Zippity_Indicator > 0)
Then (Exit Short on Tomorrow's Open)
My little idea takes your "portfolio selection rules" and thinks about them in a new way. My idea proposes changing their name; call them your "trade permission filters" instead. It also proposes that you move these filters right into your trading system itself, perhaps like this:

Code: Select all

If (No Position in this stock)
and (Volume > some_big_number)
and (Liquidity > some_threshold_value)
and (Fundamentals > some_threshold_value)
and (Volatility > some_threshold_value)
and (Choppiness < some_threshold_value)
and (Zippity_Indicator > 100)
Then (Enter Long on Tomorrow's Open)
 
 
If (Long Position in this stock) and (Zippity_Indicator < 0)
Then (Exit Long on Tomorrow's Open)
 
 
If (No Position in this stock)
and (Volume > some_big_number)
and (Liquidity > some_threshold_value)
and (Fundamentals > some_threshold_value)
and (Volatility > some_threshold_value)
and (Choppiness < some_threshold_value)
and (Zippity_Indicator < -100)
Then (Enter Short on Tomorrow's Open)
 
 
If (Short Position in this stock) and (Zippity_Indicator > 0)
Then (Exit Short on Tomorrow's Open)
If you do this, your portfolio of "stocks I am allowed to trade today" will grow and shrink, as the individual stocks within "all stocks" change volatility or liquidity or choppiness. You aren't stuck with a fixed unchanging portfolio when the world changes around you. It's quite possible for a stock to meet all of your criteria (and be "in your portfolio") for some periods of time, but not to meet your criteria ("out of your portfolio") for other periods. When a good performing stock suddenly becomes erratic, these rules will prevent you from taking new trades in that stock. And when a formerly sleepy, moribund, do-nothing stock suddenly turns great, these rules will let you start trading it right away.

JohnTHill
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Joined: Wed Mar 11, 2009 6:51 pm
Location: United States

Post by JohnTHill » Thu Mar 12, 2009 5:14 pm

Thanks Sluggo!

Moving the logic in line like this is my preference as well and sure beats my foolish idea of analyzing securities daily and then adding them to my basket. Reading this now it seems so obviously the preferred approach that I feel foolish for thinking about doing it otherwise.

As a newcomer I will still have to come up with algorithms for calculating:
  • Liquidity
    Fundamentals
    Volatility
    Choppiness
    Zippity_Indicator (What type of indicator should this be?)
If anyone has pointers for the best approach to calculating these I would appreciate your guidance.

I now have a better approach for the architecture of where to do this and a basic framework but I still need to figure out the mechanics of the details. Thanks again!!

nzbryant
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Joined: Mon Dec 13, 2004 10:43 pm

Stock screening

Post by nzbryant » Fri Mar 13, 2009 9:24 am

Smartmoney.com has a great screener, that I use on the first Sunday of every month to determine my stock universe for the month. You have to subscribe, but its only about 9.95/mth and good.

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