Using Velocity and Behaviour

ITUG Meeting 24 May 2014Insight Trading Pty Ltd

ACN 009 946 932www.insighttrader.com.au

02 4751 2932

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Disclaimer• This presentation refers to certain securities and portfolios of

securities only to illustrate the philosophy behind certain developments in Insight Trader software

• This in no way constitutes a recommendation to buy or sell any of the securities mentioned that may or may not be suitable for your personal circumstances

• Past price performance is not necessarily any guide to future price direction

• Before investing in any security you should seek the advice of an appropriately licenced financial advisor

• Neither Insight Trading Pty Ltd nor any of its officers, servants, agents, independent contractors or otherwise are licenced financial advisors

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Warning• The performances, over a very limited time period, of the two

portfolios of stocks used in this presentation have influenced the development of new tools in the Insight Trader software that may assist in stock selection

• These tools are simplifications of the actual methods used in the Experimental Portfolio and have not themselves been tested in practice

• Stock selection is only one component of a whole strategy that ultimately determines portfolio performance where amongst other things management of any holdings is critical

• Overall performance of a strategy cannot be properly assessed until it has been demonstrated over at least one but preferably more bull-bear cycles

Our Objective

To facilitate the development of investment strategies that will:

1. Maximise investment returns2. Minimise the risks involved3. Minimise the time required for analysis

By providing tools specifically directed towards these ends

The techniques provided in Insight Trader v18.1 that we will discuss today

• Have been developed directly as a result of the success of our Experimental Portfolio

• Are simplifications of the actual techniques that were used

• Should not be regarded as fail safe methods as all trading systems are subject to risk

• Will concentrate on the selection of stocks – only one of many components of a complete investment plan

Five Stages in Building and Managing a Share Portfolio

1. Select stocks for purchase2. Purchase the selected stocks3. Manage the trade4. Monitor the Portfolio & assess against

benchmarks5. Reassess the Investment Plan if necessary

Version 18.1 provides specific enhancements to address all aspects

• Select stocks for purchase• Purchase the selected stocks• Manage the trade• Monitor the Portfolio & assess against

benchmarks• Reassess the Investment Plan if appropriate

But because of time limitations today our discussion will focus only on the first

• Select stocks for purchase• Purchase the selected stocks• Manage the trade• Monitor the Portfolio & assess against

benchmarks• Reassess the Investment Plan if appropriate

Stock Selection

Selection of Stocks

Our emphasis will be on stocks that are:

• Financially sound• Rising strongly in price• Well behaved

1. FINANCIAL STRENGTH

Financially Sound

• The Experimental Portfolio limited itself largely to a universe of stocks that were rated by Stock Doctor as “Strong” or “Satisfactory”

• As an alternative you could use the Insight Trader “Respectable” filter that provides a list of stocks that have positive earnings and average turnovers greater than $100,000 per day

By restricting your universe to such a subset you might expect on average to improve your chances

of reducing risk from company failure

However nothing is guaranteed

• Forge Group was rated by Stock Doctor as not only “Strong” but it was given its highest accolade of “Star Stock”.

• In spite of this Forge Group plummeted 93% overnight and was wound up shortly thereafter

Nevertheless restricting your universe to either of these subsets could on balance

reduce your overall risk

The Insight Trader “Respectable” Filter

EYLD(D):>:0 Has +ve earningsANDMFLOW(20,D):>:100000 Is reasonably liquid

or to be more demanding:

EYLD(D):>:DIVD(D) Has +ve earnings and pays aAND dividend less than its earningsMFLOW(20,D):>:100000 Is reasonably liquid

2. STRONG PRICE GROWTH

Growth Rate

Stocks that have high growth rates may show superior capital gains into the future provided that the growth is maintained over a sufficient period Velocity is the indicator that measures the annual compounding growth rate and can be assessed by reading the value of Velocity from the F12 databox and from the filter list itself

Values of Velocity > 80% pa compounding are considered outstanding

All Filter Lists ordered on Velocity

• When any system is run the resulting list is automatically ordered on Velocity

• So for example just run the “Respectable” filter and the resulting list will show the fastest rising stocks at the top

• With your favourite template on screen click the “Chart all” button at the bottom of the list and all “Respectable” stocks will be tiled with the fastest rising stocks in the top left hand corner

If using the Stock Doctor “Strong & Satisfactory” List

• Put your favourite template on screen• Display the S&S list from the yellow “Light

bulb” button and click the “Get Data” button• The resulting list will be automatically ordered

on Velocity• Click the “Chart all” button at the bottom of the

list and all “S&S” stocks will be tiled with the fastest rising stocks in the top left hand corner

Arrange charts by Velocity button

Any random array of charts on screen can be ordered by Velocity at any time simply by clicking the toolbar button “Arrange charts by Velocity”

A Note of Caution

• Some stocks will show values of Velocity that can be several thousand percent per annum

• Obviously such rates of price increase cannot continue indefinitely

• Choosing the highest Velocity stock will not necessarily result in the most effective outcome

• The growth rate of a lower Velocity stock may prove to be more sustainable in the long term

3. WELL BEHAVED

Behaviour

Stocks that are well behaved show smooth steady price growth that ideally continues over long periods and their price is not subject to wild erratic swings that can frequently violate your stops

Behaviour can be assessed by reading the value of the Behaviour Index from the filter list itself, the F12 data box and by directly observing the volatility of the chart itself

Generally values of Behaviour > 80% are preferred

Consolidation Regions

• Many stocks exhibiting high values of the Behaviour Index over extended periods will eventually go into consolidation regions where the value of this index will fall.

• However, after a period of time they may break out to the upside and continue their strong growth when their Behaviour values will rise again

Arrange charts by Behaviour button

Any random array of charts on screen can be ordered by Behaviour at any time simply by clicking the toolbar button “Arrange charts by Behaviour”

ASSESSING THE CHARTS

With your tiled list of charts on screen

• Press the UpArrow key to maximise the first chart which will be the fastest moving

• Press the (Ctrl+)F12 key to display the extended data box showing values of both Velocity and Behaviour

• Press the RightArrow key to maximise the next fastest moving stock

• Make an assessment of the stock based on its Velocity, Behaviour, fundamentals and the nature of the chart itself to be consistent with your personal requirements

• If you wish to consider it further hold the Ctrl key down and click the left mouse button on the chart proper to add it to your short list

If you have (i) a Portfolio loaded (ii) set up your Risk Calculator and (iii) set a stop

• The F12 data box will also show the value of any existing holdings

• Any capital profit you are carrying• The additional maximum amount that you could

purchase consistent with the constraints set in your Risk Calculator

• It will also flag your existing buy and sell points and average buy price for any open positions

The Show Trades tbar button must be pressed to reveal this information

Clicking on the Risk Calculator button

• Will allow you to ascertain what criterion it is that is limiting the additional purchase

• Will allow you to modify your buy price from the default value of the last traded price and to calculate the number of shares permitted

SEARCH FOR NEW HIGHS

In addition to examining the list of all “financially sound” stocks

• You can specifically search for those financially sound stocks that have made a new three month high in the last 5 days:

• EYLD(D):>:0ANDMFLOW(20,D):>:100000ANDMAX(5,D):=:MAX(65,D)

This will be a smaller subset of the previous list

The Three Month High List

• Is important to examine separately as it may contain stocks that are breaking out of consolidation regions and consequently have generally lower values of Velocity

• Because these stocks are usually ranked much lower by Velocity on the complete list they are easier to overlook and therefore a specific search is desirable

• Their values of Behaviour Index will also be lower as a result of changing direction during breakout

Let us now see how it all works