Author Topic: Trading individual stocks, for a short period, based on "Analyst" upgrades?  (Read 3733 times)

bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Disclaimer: I do not actually trade this way, this is an intellectual exercise of sorts.

A few years back, I read a free e-book that I came across that talked about a particular method of trading stocks. This method involved reading the "Analyst Upgrades/Downgrades" list every morning, right before the open of the market, and choosing one of the "Upgraded" stocks based on some of their underlying principles.  The idea was to buy said stock at 9:30-10am, hold it until you make a net profit of 1% (after commission), and sell.  Repeat as many days as you can.

The author then gave a telling picture of what compounding an initial investment of $10k would do to this money to sensationalize the whole thing.

As an exercise in boredom, I paper-traded for a few months after reading this, based on his principles.  My faux-investments were up 50% in 3ish months.  Then, life got in the way and I forgot about this.

Not too long ago, I wanted to learn the programming language PHP.  I used my trading example as a way to learn HTML page-scraping (get stock quote info and analyze it for the fundamentals) and PHP-MySQL interaction (send info to a database I have, and keep track of my faux portfolio).  I didn't get that far, because we just had a baby in April and my free time is pretty minimal.

TL;DR What I'm getting at is:  Do any of you "day trade" to any degree? Is this method of riding a small wave of enthusiasm for a stock, for a small gain, an actual thing?  The e-book never talked about an "out" strategy, as in how low it would have to go to get out.  I always thought if I tracked the market with my little PHP program for long enough, I could devise the best upside/downside parameters and give it a go (ie Sell at +1.5% or -2.5%).

I'm thinking of finishing my little PHP tracking program.

iwannaretire

  • 5 O'Clock Shadow
  • *
  • Posts: 46
Re: Trading individual stocks, for a short period, based on "Analyst" upgrades?
« Reply #1 on: September 25, 2012, 04:15:50 PM »
Personally, I would be very careful utilizing that type of strategy because a lot of the big brokerage firms upgrade a stock at its highs so they can sell it for a premium or downgrade a stock at its lows so they can buy at a discount.  There's no guarantee you'll get your one percent after an upgrade before the heavy selling starts. 

My recommendation would be to paper trade your theory for several months, hopefully in several markets and see how well it works.  No matter what, though, you'd want to make sure you set a stop because those little one percent gains can quickly disappear in a single bad loss.

As to day trading in general, there are tons of different ways to day trade the market.  I'd recommend getting the following book at the library to read: Van Tharpe, Trade Your Way to Financial Freedom.  It can explain better than I how to determine whether your system actually works and where best to place the stops in that system.  That said, keep in mind that the book was written several years ago, when the market was not quite so volatile.  It is very tricky today to be able to both (1) limit your risk by setting reasonable stops, and (2) not get stopped out every time someone in Europe sneezes.



 

« Last Edit: September 25, 2012, 06:04:49 PM by iwannaretire »

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Given that this strategy isn't particularly creative, and that it's based on publicly available information, I strongly suspect that quantitative traders at banks and hedge funds would have long since sucked the arb out of this trade. The fact that your ebook didn't give stop out instructions on failed trades renders it extremely suspect (useless actually since it's not even a full strategy).

Quote
a lot of the big brokerage firms upgrade a stock at its highs so they can sell it for a premium or downgrade a stock at its lows so they can buy at a discount.
Any evidence of this? Having worked on the front lines of an bulge bracket investment bank for a number of years, I'm generically suspicious of most of these conspiracy theories (though I'll happily grant that Wall St is far from ethically flawless and conflicts of interest certainly exist). If this happens to be true, you could simply fade analyst upgrades/downgrades and reliably arbitrage the market that way. Again, this effect would be negated by any number of stat arb traders.

No harm in running a tracking program.  If it works you can launch a billion dollar hedge fund on the back of your black box strategy. Just make sure the numbers you're using are actual market executable levels.