Buy Low & Sell High Experiment
Buy Low & Sell High Experiment 52-Week Lows
There is one fundamental principle in stock investment – buy low and sell high. So far I have only learned about the volatility part of the game.
In hydraulic engineering, I have learned that there are two ways to generate energy. One is to use tidal waves and another is to generate hydropower using dams.
In the 1990s, I achieved some gains using the knowledge from water systems. I mapped the Internet systems to the water systems. It worked perfectly. Now it is time to practice the hydropower game in investing again.
First let’s review the hydrological equations related to hydropower.
P = e g Q H
Where e is the hydropower plant efficiency, g is gravitational acceleration, Q is the flow passing the hydropower plant, and H is the effective water head in the reservoir.
In this equation, the balance of Q and H should be optimized in order to achieve the maximum hydropower output. If the Q is too big, then H is lost to fast. If Q is too small, then H is maximized, but a portion of the flow would be released from the spillway without passing through the hydropower plant.
In investment, I have the same problem. At one side, I can achieve capital gains by waging the maximum investment amount. At another side, I can achieve capital gains by waiting for the maximum price movement. However, the optimal capital gains are achieved by balancing the investment amount and the price movement. So the same equation used for estimating hydropower can be applied to money management.
P = e g Q H
Where P is the profit, e is the tax efficiency, g is the probability of winning, Q is the number of shares bought in one investment, and H is the price movement.
One way to create the investment situation the above equation can be applied is to look for the 52-week lows of the market. When the stock price is at its 52-week low, there is an excellent probability for the stock price to reverse itself in the next 52-weeks to reach its 52-week high. Between the 52-week high and low, there is a great potential for price movement to be positive.
However, there are a lot of examples working against the above assumptions. The stock price can continue to move down after it reaches the 52-week low. The prices of many companies go all the way to zero and into bankruptcies.
One way to mitigate the zero price movement is to use mutual funds. ETF is one of the greatest potentials. I am going to practice this methodology with the following rules.
First I have to be very carefully in selecting funds among the 52-week lows. I should select only the funds which have the potential to reach its 52-week high in the coming 52 weeks. The selected fund price must be lower than 80% of its 52-week high. This is to guarantee the 25% potential gains. For the first investment, the amount should be enough to sell three times or 6k. This is to guarantee the average 10% capital gain for the selected fund. I will use the 5% rule to add new or reduce investment, which is to add or sell 2k at 5% intervals. I will not add new fund until the first fund is completely sold out or until the fund become a permanent fund of 40k. With one million dollars, one can establish a portfolio with 25 such funds
Now I have to estimate the potential capital need. If there is a 50% probability of winning 11.11% (10/9) each time, then the Kelly fraction is 5%. That is 20 times the original investment of 6k, or 120k. So the potential capital need for this experiment is 40k to 120k for each new fund.
Now I will commit 100k for this experiment. I will call this experiment as Experiment 52 Week Lows. There are three major sources for obtaining the 52-week lows data: Bar Chart, NASDAQ, and MSN Money Central. The Bar Chart list is usually the most complete list.
There is one fundamental principle in stock investment – buy low and sell high. So far I have only learned about the volatility part of the game.
In hydraulic engineering, I have learned that there are two ways to generate energy. One is to use tidal waves and another is to generate hydropower using dams.
In the 1990s, I achieved some gains using the knowledge from water systems. I mapped the Internet systems to the water systems. It worked perfectly. Now it is time to practice the hydropower game in investing again.
First let’s review the hydrological equations related to hydropower.
P = e g Q H
Where e is the hydropower plant efficiency, g is gravitational acceleration, Q is the flow passing the hydropower plant, and H is the effective water head in the reservoir.
In this equation, the balance of Q and H should be optimized in order to achieve the maximum hydropower output. If the Q is too big, then H is lost to fast. If Q is too small, then H is maximized, but a portion of the flow would be released from the spillway without passing through the hydropower plant.
In investment, I have the same problem. At one side, I can achieve capital gains by waging the maximum investment amount. At another side, I can achieve capital gains by waiting for the maximum price movement. However, the optimal capital gains are achieved by balancing the investment amount and the price movement. So the same equation used for estimating hydropower can be applied to money management.
P = e g Q H
Where P is the profit, e is the tax efficiency, g is the probability of winning, Q is the number of shares bought in one investment, and H is the price movement.
One way to create the investment situation the above equation can be applied is to look for the 52-week lows of the market. When the stock price is at its 52-week low, there is an excellent probability for the stock price to reverse itself in the next 52-weeks to reach its 52-week high. Between the 52-week high and low, there is a great potential for price movement to be positive.
However, there are a lot of examples working against the above assumptions. The stock price can continue to move down after it reaches the 52-week low. The prices of many companies go all the way to zero and into bankruptcies.
One way to mitigate the zero price movement is to use mutual funds. ETF is one of the greatest potentials. I am going to practice this methodology with the following rules.
First I have to be very carefully in selecting funds among the 52-week lows. I should select only the funds which have the potential to reach its 52-week high in the coming 52 weeks. The selected fund price must be lower than 80% of its 52-week high. This is to guarantee the 25% potential gains. For the first investment, the amount should be enough to sell three times or 6k. This is to guarantee the average 10% capital gain for the selected fund. I will use the 5% rule to add new or reduce investment, which is to add or sell 2k at 5% intervals. I will not add new fund until the first fund is completely sold out or until the fund become a permanent fund of 40k. With one million dollars, one can establish a portfolio with 25 such funds
Now I have to estimate the potential capital need. If there is a 50% probability of winning 11.11% (10/9) each time, then the Kelly fraction is 5%. That is 20 times the original investment of 6k, or 120k. So the potential capital need for this experiment is 40k to 120k for each new fund.
Now I will commit 100k for this experiment. I will call this experiment as Experiment 52 Week Lows. There are three major sources for obtaining the 52-week lows data: Bar Chart, NASDAQ, and MSN Money Central. The Bar Chart list is usually the most complete list.
posted by Unknown at 10:53 PM
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