Stock Trading: Quant 101 and the End of the Month Strategy
In some ways, the rise of quantitative analysis when it comes to stock trading and developing stock trading strategies started out in surprisingly basic ways.
Experts in statistics and quantitative methods simply began spending time with professional traders – many of them floor traders with decades of experience, other veterans of the hedge fund trading world – and asked them why they did what they did.
To the best of their ability, the pros did just that, explaining in the only words they knew how they were able to know which stocks to trade, when to buy, when to sell. And when they were done, the quants went back to their offices and laboratories and set out to translate those trading insights into the language of computers and machines.
So while the process of that translation can be complex, the results are often surprisingly straightforward. It was, for example, processes like these, following the behavior of professional “market makers” that helped short term traders understand the value of buying markets after they have pulled back rather than after they have rallied.
It also helped produce one of the more common edges from Larry Connors’ book, Short Term Trading Strategies That Work: A Quantitative Guide to Trading Stocks and ETFs, an edge called “The End of the Month Strategy,” As Larry wrote:
You may be aware of the “end-of-the-month” concept whereby money managers supposedly pile into the stocks at the end of the month in anticipation of 401(k) and retirement savings money coming in.
Well, we decided to take a look at whether there was any statistical evidence to support this concept, and if there was, how we could potentially profit from this behavior.
You can read the rest of Larry’s report in Chapter 11 of Short Term Trading Strategies That Work. If you don’t already own a copy, you can download a pdf copy of the book for free or have us send you a paperback copy. See the link below to choose your option.
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Here are 7 Stocks You Need to Know for Thursday
Shares of ^FDX^ rallied by more than 2% on Wednesday after reporting positive quarterly revenue and guidance for 2012. The stock is up more than 7% from its last oversold close in the first half of June.
Both scheduled to report quarterly earnings on Thursday, shares of ^DFS^ and ^ORCL^ both pulled back by more than 1% ahead of Thursday’s session.
Shares of ^NFLX^ pulled back by more than 2% on Wednesday after rallying into strength above their 5-day moving average in Tuesday’s trading. Shares of Netflix were in oversold territory as recently as Monday’s session.
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Coffee company stocks are among those becoming increasingly overbought in the short term. Up again on Wednesday were both ^GMCR^ and ^SBUX^. GMCR and SBUX both gained more than 1% ahead of Thursday’s session.
Shares of ^AIG^ closed higher for a second consecutive trading session in overbought territory below the 200-day. The stock is one of a growing number of financials that are becoming increasingly oversold at these levels.
David Penn is Editor in Chief of TradingMarkets.com