Hi Steve, Hope you remember to slather on some sun screen before spending the day tending to the BBQ. It looks like it's going to be a great day here in WI. Sun's out and warming up nicely.
One of the first things I did when switching from paper to computer with AIM (this was 1988, BTW!) was to plot a 26 week moving average against the price/trade history. I wanted to see what its relative "technical efficiency" was compared to this rather basic measure. As you know, I still keep the 26 week MA line on my graphs. I've been asked by people who don't know AIM how I factor in the Moving Average. There I am forced to tell them that AIM doesn't care about it!
It would seem to me that something approaching Myst's X-Dev could be developed around such a basic value as the MA. Develop a data base that shows that 80% of the time the deviation from the MA is a certain amount + or -. Then trade the 20% of the time that it varies beyond those levels. You would then be trading the "break outs."
Of course such a system would not be tied to one's costs, so would suffer at times from whiplash.
I don't know what "Magic" there is in the 26 week MA. I guess it would look the same on a daily chart with 125 days being the baseline. I just remember being very impressed that the AIM trades occurred on the "proper" side of the line most of the time.
There might be some relationship between the overall Hold Zone's size (with 30% being AIM BTB) and the natural rate of change in prices. If one could factor in the psychometrics of the investment community, one might find that it is difficult to move a price 30% in less than a certain amount of time. This would have to do with the variety of prices of stock ownership that the community owns. We could assume that it's a Bell Curve of some sort that floats around the current price. As the price shifts, the Bell Ccurve falls off center. Buying and selling takes place which shifts the Bell back toward center. However, to shift the Bell a significant amount, like 30%, takes a very large shift of ownership of the total shares outstanding.
Different classes of equity are going to have different size and shape Bell Curves. High dividend payers will differ from biotech. I guess this is because the different classes attract different groups of investors. Someone who buys for "income" tends to be closer to the Buy & Hold end of things that someone who's looking at "story stocks."
I've owned some companies stocks long enough to see their trade patterns change with time. Where once wildly volatile, as the company matured and became more consistent in earnings, etc. the amplitude and even frequency of price swings dampens. I've usually been slow to adapt.
At first blush it would seem if we're going to have a more frequent trade rate (weekly or daily VS bi-weekly, monthly or quarterly) that our base line of measurement would benefit from being shorter also. However, the longer term measure seems to still have merit. While we could be trading for smaller "round trip" gains with the price above the longer term MA, we might be setting ourselves up for disaster if the longer term trend were to change to bearish.
I would look back at my VTSS history from 1993 as verification of this. Between 1993 and 1998 VTSS very rarely dipped below its 26 week Moving Average. If we'd set up an over-ride to AIM of never making purchases unless we saw a breakdown below that measure (as I had) we would have missed many round trip, albeit lower profit, trades. However, when the price/share did dip below that measure and we finally executed our pent up buy demand, it was highly profitable. Why did I single out VTSS at that time for this treatment? It was the company's extreme P/E which held my attention.
Actually I treated GNSS in a similar fashion. However, with GNSS, it wasn't the 26 week MA that I watched, it was trailing earnings and P/E. From its peak it rather quickly passed through the 26 week "barrier" I had used on VTSS successfully. However, I'd chosen a price where the P/E would make sense if earnings were stable. I then waited to restart AIM until that price/share barrier had fallen. As it turned out, by the time that happened, I'd already "borrowed" all the cash reserve from GNSS anyway, so didn't restart it for another year! (STREWIE Award Candidate??)
Don's contribution of the Zig Zag analysis gives us insight into the "personality" of the potential stock or fund in which we would like to invest. Call it constructed experience for lack of a better term. It also can be used to test if there's been a change in the personality of an existing holding. Also, if one wanted to review the entire portfolio for AIMworthiness, Zig Zag (ZZ) offers a very handy method.
Visually ZZ gives us a nice picture of the Frequency of potential trades at a specific Amplitude. We then can decide on its AIMworthiness relative to our own business plan. It might also help us decide on where in our portfolio such an investent is best suited. For instance, if we find a fund that has relatively few ZZ peaks over three years at 30%, but has many more at 20% we might think about this one for our Retirement account. Since there's no direct taxation of capital gain in the retirement account, we would gain the most from the more frequent, but less profitable round trips.
It is encouraging to note that when we set up a weekly StockCharts.com graph with a 26 weeks as the MA and then play around with the ZZ size (our AIM Hold Zone) we can see where it starts to become less efficient in trading. Maybe at 20% ZZ we still have essentially all the trades on the "proper" side of the MA, but if we drop to even 18% we start to see many more on the "wrong" side.
My fingers are getting tired and I have to conserve strength for flipping burgers, turning bratwurst and BBQing chicken parts. I'm sure I've mentioned my Crock Pot BBQ chicken before. It's a quick pass on a hot fire for breasts, thighs, drumsticks and wings. This gives them color and grill markings, but doesn't attempt to cook it through. Then in a ratio of 2:1, mix beer with your favorite BBQ sauce in the crock pot. Load the chicken bits into the crock pot and cook on low for 12 hours. Makes a great meal with little fuss.
Thanks for the question and restarting my brain cells.
Best regards, Tom
Market Data 
Markets 
AI
