“Trade like a Hedge Fund” – James Althucher (part II)

Today I'm going to talk about some techniques explained in the book.

Technique 1. Playing gaps

Every one of us had heard that gaps tend to be closed. Here James Althucher studies it a bit with stocks, with 2% and 5% gap and with the day before being down too or not. The conclusion is that buying a 5% gap in a stock that the day before have been down is a profitable strategy with the back test he had done between 1999-2003. He had done with the condition that closes the trade when hits yesterday close or at the end of the day. 60% winning trades with average profit/loss of 2%.

Tehnique 3. Buying bankruptcies.

First of all it's not so common, mainly in Spain with no more than 300 stocks. But it's good to think about it. He argue that after the bankruptcy the company open much lower and a lot of people that have shorted it close the position making a short squeeze.

Tehnique 10. Deletions from the indexes (and adding)

Some studies say that on average, between the announcement date and the effective date, a stock tends to rise about 5 percent. After the effective date they tend to sell-off. For me it's more interesting to short newer indexes members after the effective date.

However here James show a study about the effect of the deletions, and the conclusion are quite clear. From 97 to 03 the day after the deletion of S&P 600 the stock went up an average of 8%, and 5 days after the deletion they went up a 15,84%.

So is an interesting technique. It can be implemented in Spain too.

As often happens to all temporal techniques, when everybody knows it, it's normal that the things happen earlier and in the next years maybe buying them one day before the deletion can be the optimal trade. I will be looking that!!!

Technique 12.  End of quarter, end of month.

It's not one of the most interesting technique although is one of the most commented in the web. In some of the webs I read it has convinced me about the falling pattern of the last day of the month, and the up movement of the first day of the month.

In my opinion it's not a trading technique itself but can help you in the timing of your trades.