A.I.M. Users Bulletin Board

[OldAIMGuy]

Hi Steve, Just for fun this AM, using StockCharts.com, I took
a couple of favorites from my portfolio and built three year
weekly graphs. I then played with Zig Zag all the way from 1
to 40 just to see where things occurred.

Obviously the most zigs and zags occurred at 1 and the least
at 40. That I assume we all could have guessed. However,
there appear to be places where just a percent or two shifts
the number or round trips significantly. At other places no
change occurs at all over the spread of several percentage
points. In other words, just in these two examples I found a
large degree of nonlinearity. I had seen this before, and
maybe even commented on it, but relative to our discussions
today, feel compelled to make the point again.

In one case, CGNX, large discrepancies occurred in several
spots. For fun I used the 26 week moving average and also
counted "inappropriate" or "bad" trades, where the activity
occurred on the "improper" side of the M.A.

 
 ZZ Value    # Of Peaks    # of "bad" trades 
 15            24               14 
 16            22               12 
 17            21               11 
 18            18                9 
 19            18                9 
 20            16                7 
 21            15                6 
 22            13                4 
 23            12                3 
 24            11                3 
 25             9                3 
 26             9                3 
 27             8                3 
 28             8                3 
 29             7                3 
 30             5                2 
 31             5                2 
 32             4                1 
 33             3                0 
 34             3                0 
 35             3                0 
 - 
 - 
 40             3                0

I started the list about where the "bad" trades became about
1/2 the total trade amounts. From there both the number of
trades and "bad" trades decrease as the size of the Zig Zag
(AIM Hold Zone) increases. This is logical. However, you will
note that there are spots where we gain more in "efficiency"
or good trades with only a single point change in Hold Zone
size and little change in the number of trades. These sweet
spots may suggest our best Hold Zone sizes for an individual
equity.

Of course we could pick a different time frame for the same
company and it might give us different settings. This won't
predict the future, but does give us an idea of what settings
might be appropriate for our business model. As mentioned, in
my Individual Retirement Account I will trade with a smaller
Hold Zone usually than in my Taxable Account. This is because
there's no loss to taxes. Since our "overhead" is less, we
can therefore act differently.

In this case, I might choose a Hold Zone of 20% to increase
trade activity. There, the number of "bad" trades is half of
what it is at 15% yet we've not dropped a linear amount in the
total number of trades. In my taxable account I've been using
30% overall (20% Total SAFE plus 5% min. trade size) but might
consider reducing it to 26%. I'd theoretically gain 80% more
trades with just a 13% reduction in LIFO return. This would
seem to be a reasonable trade-off. Also, only one extra "bad"
trade is added.

Best regards, Tom