A.I.M. Users Bulletin Board

[ls7550]

AIM, MyWay, LD-AIM etc. are all Martingale based systems of adding to losers, reducing from winners. Such systems win little amounts often but periodically hit a large loss.

We all know about the deep dive and stay down risk with AIM. If I recall correctly Steve in order to slow cash-burn you use a 15% minimum decline from the prior buy trade before making another buy trade. Others increment Buy SAFE by 10% after each successive buy trade (resetting when a sell trade occurs). In either case, when started with 50-50 stock and cash such cash-burn reducing approaches help preserve cash down to lower share price levels.



Historically during the Wall Street Crash share prices halved, halved again and halved yet again, such that a share price of 100 declined down to 12.5 type levels. A 50-50 stock/Cash AIM with declines 15% between trades or increase buy SAFE by 10% after each successive buy trade will support such a deep dive. Other more aggressive/less-conservative allocations, such as 60-40 initial stock/cash or trading AIM/MyWay without cash burn considerations in mind will exhaust cash a lot earlier and potentially leave you all-in at a relatively high price and in effect sitting dead in the water (either having to take a loss and start all over again or wait maybe years for a recovery to occur back towards your average cost of stock).

Here's a log stochastic ladder of starting at a current 100 price with a $33K total investment and looking to trade $1000 amounts, starting with around 50-50 stock/cash allocations i.e. set to much the same as the AIM sequential buys example I used above. I set the bottom of this ladder based on halving three times down from 100 to 12.50 (i.e. 100 to 50 to 25 to 12.5), which to have approximately 50-50 stock/cash initial exposure means the top has to be three double-ups higher (100 to 200 to 400 to 800)



Looking down the PRICE column we see that at around a 100 price the ladder indicates around half the $33,333 total 'Fund Allocated' amount allocated to this ladder be held in cash reserve.

So in this case we start with 50-50 stock/cash and fully exhaust all cash reserves at a share price of around 12.50 and fully exhaust stock to sell at a share price of around 800.

For this particular example the ladder rungs occur at around 13% price intervals, so if I were trading this ladder I'd probably actually trade at 1 step (13%) same direction (buy after a previous buy, sell after a previous sell), 2 step (26%) reverse direction (buy after a previous sell, sell after a previous buy).

For this ladder trading a single step down and single step back up again produces a gross $132.89 profit. Trading multiple steps at a time increases that (potentially significantly) but encounters such trades less frequently than trading each and every step. Generally however it is better to trade multiple steps such as the 1 step same direction, 2 step reversals. I've a Point and Figure (PnF) spreadsheet that also includes a ladder that I use for backtesting and generally trading in a PnF like manner (when 'O' change to 'X' or 'X' change to 'O' i.e. at reversals) is better than trading each and every step.

The main point being however that it is quite easy to increasing trading gains either by setting a lower TOP share price (at which point you're all out of stock) and/or setting a higher BOTTOM share price (at which point you're all out of cash reserves).

As a guide, if from a current price of 100 I'm content to sell out of stock at a share price of 150 and run out of cash at a share price of 50, then the gross gain for a comparable sized single step up/down rises to $507 which is 3.8 times more than the $133 type amount identified for the much wider ladder (800 top, 12.50 bottom). Going to an extreme of all in at a share price of 80 and all out at a share price of 120 yields around a $1375 gross profit per similar sized single down/up step cycle. You also have higher levels of initial cash reserves to hand so those might be redeployed into one or more additional ladders which scales up the potential gains even more. Which is no different to moving into highly leveraged type territory, together with the risks that induces.

So its dead easy to scale up the Martingale type many small wins, but in so doing you run the risk of selling all out of stock relatively quickly (not really a problem as you just start all over again) or running out of cash reserves relatively quickly (much worse as you're all-in and stuck in dead-water).

MyWay appears to tempt you towards such scaling up and does so both at the individual investment (stock/ETF level) AND at the Portfolio level. So I suspect it could provide fantastic gains over the many short winners type events, but could encounter a deep into dead-waters event much quicker also.

MyWay seems to use short term trading methods to pick off trade timing points. I've disassembled the program but it seems to have been written in assembler so I've not spent too much effort to resolve the particular timing methods they actually use. I suspect that simply trading in a point and figure 1 step (box) same direction, n step (box) reversal or conventional AIM like manner at W%R or moving average cross-overs is likely just as good over the longer term. Stocks on average swing through 50% of their price range each year (year low / year high is typically 0.5), so 30% hold zones (between buy and sells) is a reasonable average choice.

MyWay just seems to give you multiple ways/combinations to scale up (or down) hold zone, trade sizes, AIM SAFE like settings etc. that in effect just do similar as adjusting Ladder type top and bottom values.