About ten years back I was working with a professional fund manager who had some sort of PhD in statistics and was a genuine computer wiz. We worked together with different back testing applications that gave us a chance to back test hundreds of various indicators and tactics. The tests were exhausting and also involved 30 years of stock trading game prices. The results were determined by pure math so there was no bias or human intervention interested in manipulating the test results. Which is very important given the nature of this testing.
The test results surprised us greater than you could ever imagine. Things we thought worked would not work and things that would not work worked better than many of us imagined. While I can't divulge exactly what we discovered, I can provide few bits that will improve the size of your winners and will raise your percentage of winning trading.
One of the biggest and quite a few interesting discoveries was about the relationship of volume and price. We wanted to see which kind of impact volume had on cost. The results proved that volume increase without any sort of news or fundamental reports stirring the stock or the stock sector triggered 76% of the stocks experiencing a huge price changes within 2 trading days in the volume spike. You may think to yourself that's not that astonishing because when stocks have pointed up volume increase, prices usually move prepare yourself.
This is not the most exciting perhaps the test results. The best part has gone out of that number 8 from 10 stocks remained at the revolutionary price level while only 2 stocks returned to the previous price level after 5 trading days. Consequently when volume drastically increases and stocks begin moving without any outside news that would reveal the move, they end up either continuing moving or stay at that new price level approximately 1 week. Than they would change and go to a different direction.
When testing sharp volume increase associated with fundamental news directly impacting this stock or the stock segment the stock experienced a dramatic price change about 85% of the time. But only 3 out of 10 stocks remained for the new price level while 7 stocks returned to their previous price level. This communicated to us that when prices move either up or even down when earnings or other information related to that stock or stock segment is released, the stock has already moved and can reverse direction very quickly to return to the previous price ranges.
From this test we found that entering stocks because news is driving up prices is just not a smart idea because of the time the news comes out almost all of the stocks already shifted either up or down and you will be moving back to the previous price level in less than 5 trading days.
The more exciting part in the test was learning that sharp volume increase without any sort of news and reports related to that stock or stock sector was a good time to enter stocks in the direction of the move because the odds are 20% or less that this stock will move against you substantially next 5 trading days.
The test that's used in our study required at least 75% increase in volume within the average volume of the previous 5 trading days. So if your stocks average daily volume is all about 1 million shares, you would try to find volume over 1. 75 million shares. The entry would occur at the end of the day on some sort of MOC (Market On Close Order) as well as the position was held for 5 days. The exit would occur at the end of the trading session on day five.
We learned from this test that when Volume is used the right way it can be the most effective stock market analysis tools. When volume is rising greatly and stocks begin moving the vital thing you want to see will be if there's any news that could be causing the sharp volume raise. If there is no simple news causing the sharp rise in volume the odds are to your advantage that any significant change in the cost of the stock is meaningful and also real.
If on the other hand you notice a sharp increase in volume and you will find there's fundamental reason behind it the odds are very strong that this move is temporary or might be already coming to an end and you will be most likely reversing within the subsequent trading week.
Next time I will give you some more findings from our stock trading game analysis tools test.