Replies to post #4045 on A.I.M. Users Bulletin Board (AIMUSERS)

[Foxlette]

morning AIMers

I'm here with a warm-up, though most of y'all don't need it [it's a hot one]


8:16AM: S&P futures vs fair value: -0.3. Nasdaq futures vs fair value: -5.5. Equity futures point to a moderately lower open as we continue to roll through earnings season. Nas futures under some pressure as Siebel Systems (SEBL) warns and IBM's (IBM) was only modestly bullish. Outside of tech, Eli Lilly (LLY) and Southwest Air (LUV) have warned. However, Sears (S) and Allstate (ALL) have guided higher. On the earnings front, most are making or exceeding Q2 consensus estimates.

[karw]

Hi Bernie,

Most of the time I also use the 5% for minimum Buy/Sell, but for some stocks I use 10% minimum Buy.



Each time you have a sell the number of shares decreases with a factor 0.05:

S2 = S1(1-0.05)

after 2 sells this gives:

S3 = S2(1-0.05) = S1(1-0.05)^2

These formulas look familiar if you remember compound interest formulas.

So the number of shares after N sells is:

Number of shares = S1(1-0.05)^N



Now we do the same for buying:

Each time you have a buy the number of shares increases with a factor 0.05:

B2 = B1(1+0.05)

after 2 buys this gives:

B3 = B2(1+0.05) = B1(1+0.05)^2

So the number of shares after M buys is:

Number of shares = B1(1+0.05)^M



Now combine the sells and buys, they can happen in any order:

Number of shares = StartNumber(1-0.05)^N*(1+0.05)^M




We now can guess a relation between N and M:

Maybe M = N (1 + 2* Safe + 2*0.05)



Then if we want to increase the number of shares by a factor 100 we get the following equation:

100 = (1-0.05)^N * (1+0.05)^{N*(1+2*Safe+2*0.05)}

We assume Safe is 0.1

We solve this for N and we get roughly 500.

We used 5% as a minimum trade but we can parameterize this as well.

For 1% we get roughly 2500
F02 2% we get roughly 1000
For 10% we get rougly 200

The curve is symmetrical around 2.5%. Above 2.5% the number of trades decreases slowly while below the 2.5% the number of trades increases fast. The curve has the form of a hyperbola.



When you maximize this function(the 100 becomes variable) you get for the best trade size roughly 6%.

This seems to be a good candidate for using as a minimum trade size. In fact I may change my spreadsheets now!



Greetings, Karw

[Conrad]

I agree on that Bernie.

Your points are well taken and they are good points as well. In turn I like to point out to other people the good point some people make:

With some experience an AIMer will learn what is more or less right and what is not working. But this also means that with mutual funds for which the only trading cost is a 0,5% fee you can AIM with very low quantities. I have done this as well.

Of course, with a small portfolio you could ask if the time spend and the money earned is worth the trouble. In the same light(or darkness) you could ask if sailing is worth the trouble, or worth the money you have to spend on it.

Regards,


Conrad