a Buy & Sell Strategy

I've always felt that people over-react to good or bad news ... especially stock traders.
Earnings come in a penny below estimates, everybody yells "the sky is falling!" and the stock plummets ... only to quickly recover.

>Yeah, so?
So I figured I could take advantage of that as follows:

  • I look for a high-volatility stock. One that often changes by 3 or 4% in a day.
  • If the closing price is significantly lower than the open, I buy at the close ... figuring that it's an over-reaction and the stock will recover quickly.
  • If the close is significantly higher than the open, I sell at the close.
>You always buy or sell at the close?
Yes. I have my finger on the Buy / Sell button when the market closes.

>And it works? I mean, have you made a bundle with that strategy?
Last year, 2007, I was heavily into CBQ and was quite succesful, making 25% for the year.

>And this year, 2008 ... it still works?
Uh ... no, but I thought it was interesting nevertheless.

>Where do you find them stocks that plummet then recover?
You can try DSA.

Here's a spreadsheet that employs this buy-sell strategy:

Example #1: Click the picture to download the spreadsheet
  • We start with a certain number of Shares (Example: 1000, in the picture above)
  • We also start with a bunch of Cash (Example: $5,000)
  • We always buy or sell a fixed number of Shares (at the closing price) (Example: 200)
  • We BUY whenever the Close is smaller than a previous Open by a certain percentage (Example: -2%)
  • We SELL whenever the Close is larger than a previous Open by a certain percentage (Example: 2%)
    Of course, we don't buy if we don't have enough Cash to handle the trade and we don't sell 200 shares unless we have that many shares to sell.
>Compared to a previous Open?
Yes, we might look for dramatic changes over 1, 2 or 3 days, comparing today's Close with the Open a few days ago.
In the example, we're comparing today's Close with yesterday's Open (back 1 day) in order to determine whether we should BUY or SELL at today's Close.
Notice, too, that we've sold all our shares by Mar/06 then start buying as MSFT decreases in May & Jun/06.
Then we're selling again as MSFT recovers and end up selling all our shares by Dec/06 (which accounts for the "flat" portfolio graph).

>Looks good to me ... Compound Annual Growth Rate = 8.8% instead of ...
Instead of CAGR = 7.5%, yes ... and our portfolio volatility is much lower. Did you notice that?
However, you can't count on it. Besides, you have make clever choices for the numbers you enter into the red boxes.
That's pretty easy when you look at historical data, eh?
If you buy when Open-to-Close decreases by 3% (instead of 2%, as above) and sell when it increases by 2% (as above), you get this:

Example #2

>Your return decreased! What good is that?
We've avoided that magnificent drop in MSFT ... and do you see the decrease inVolatility? That let's me sleep at night.
Besides, Examples 1 and 2 were for a stock (Microsoft) that increased over the past 5 years.
If we keep the same parameters as in Example #2, but look at another stock (General Motors):

Example #3

>You're happy with a negative return?
Well ... it's not so negative as a buy-and-hold GM portfolio. Besides, I'd sleep better because of the reduced Volatility and ...
Did you notice that slider? You can change the number of Days Back, comparing today's Close with today's Open or yesterday's Open or ...