Archived entries for Methods

The Regression to the Mean


Playing Dice by René Schützenberger (circa 1910).

Peter Bernstein’s Against the Gods captivating history of risk rekindled and made me look with new eyes the regression to the mean trading approach —where many good methods take their cue.
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The Contango

Hilary Till, Principal Premia Capital Management, LLC

Hilary Till, Principal Premia Capital Management, LLC

Continuing with Hilary Till’s study, the next interesting find is the roll yield embedded in the term structure of futures contracts. In her own words:

In the past, even if spot commodity prices declined, there was an additional way that a commodity investor could have a positive statistical expectation of profit, and that was through the “roll yield” embedded in certain commodity futures contracts.
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A Rebalancing act


Balancing Act by Dion Wright.

Hillary Till, from the French EDHEC Risk and Asset Management Research Centre, published a very instructive study  (copy here) on commodities. She touched on a couple of interesting tools which are vital to improving our bottom line. I’ll start with the unequivocal advantage of rebalancing a portfolio periodically; which not only safeguards investments, but furthers returns.

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The Robot

John Dorfman has this little but very profitable (34 % yearly) method of stock selection: The Robot. I like it… it screens a very safe set of stocks. One of these days I’ll compare it to the Dow dogs method. But for now, I’ll copy John’s directions and add it to our… bag of tricks.

According to Dorfman:

The Robot Portfolio is a simple quantitative stock-picking model. I designed it to make the point that unpopular stocks are better investments than popular ones. It’s easier for unpopular stocks to exceed prevailing expectations.

The Robot starts with the universe of U.S. stocks with a market value of $500 million or more. It eliminates those companies whose debt is greater than stockholders’ equity, and also slices off those with negative earnings over the past four quarters.

From the approximately 1,000 stocks that remain, the Robot selects the 10 with the lowest price-earnings ratios (stock price divided by the past four quarters’ earnings).

…Going to the movies


NYMEX_CL_X06, Chuck Le Beau's Giant Footprints

This is a snap shot of Chuck LeBeau’s latest little film; and it’s related to the recent drop in crude prices. Unfortunately for Amaranth, they did not take to heart this basic lesson in trading…

Click here to watch this nice video.

Happy trading.

Giant footprints

Chuck LeBeau

Chuck LeBeau

Chuck LeBeau, author of a few trading books and a trader I respect very much, sent this promo video of his MarketClub, which I find quite instructive and entertaining…

He describes step by step his "Great Footprints" trading method; which in essence looks at the quarterly, monthly, weekly and daily charts of a security to confirm its trend.
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Trend channels

As we previously saw with the channel breakout method, channels are a good source of support and resistance. But channels can also be used when prices are trending.

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