This Is How I Put the Odds in My Favour…

Businessman analyzing investment charts at his workplace
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It’s almost that time of year again…

Melbourne Cup Day.

Yes, I know the race is still two months away. But first nominations are now in. This means you can start studying the form. You can also begin placing bets.

But there’s a catch to getting in early. You’ll have to sort through a lot more horses.

At the close of nominations, there were 124 contenders for the Cup — that’s over five times the eventual field of 24.

Just think about that.

Most of these horses won’t even get to the mounting yard. Forget about trying to find the winner. Merely seeing your horse at the barriers will be a result.

So why choose from the first nominations list?

Sure, the good horses are in there…but so, too, are a lot of non-starters. Your odds of success are obviously better if you select from the final 24 runners.

The same reasoning applies to the stock market.

Consider this. The ASX has over 2,000 listings. Some of these will go on to become next year’s top performers. The best stocks could rise by hundreds of percent.

But not every stock will make the grade.

This group will inevitably include hundreds of ‘non-starters’. These stocks will typically trade sideways or in downtrends. Buy too many of these and you could lose your shirt.

Have a look at this chart…


Source: BigCharts
[Click to enlarge]

You’ll be familiar with this graph. It shows the movement in the All Ordinaries since late 2014. The market is up a mere 50 points — or 1% — from 22 months ago.

This type of grinding market can be really hard. Many stocks bounce around without going anywhere, while others fall for months on end. I’m sure plenty of traders are struggling.

But this doesn’t mean you can’t make money.

Part of the Quant Trader service is the weekly Overflow Signals. This lists every ASX stock that meets the Quant Trader entry criteria. It provides a quick way to sort through the 2,000-plus listings.

I had a look at the current line-up during the week. There were 107 hypothetical trades showing gains of 20%, or more. The top 20 trades were up by over 80%.

Just think about that for a moment.

You can make big gains even in a tough market — the opportunities are still there. The trick is to find them among all the poor performers.

The market within

I talk a lot about buying into strength. The key reason for this is to trade with the trend. This can increase your odds of making a profitable trade.

But that’s not all.

Strength is also an excellent screening tool. By only focusing on strong stocks, you automatically cull many of the worst performers. This can give you a big advantage.

Take a look at this next chart…


[Click to enlarge]

This graph shows the performance of Quant Trader’s live buy signals. As always, there’s no allowance for costs and dividends. It also assumes $1,000 on every signal.

Now, this covers the same period as the chart for the All Ordinaries. While the broader market has been tracking sideways, the profits from Quant Trader’s signals have been on the rise.

Have a close look at the two graphs. There’s very little correlation between them. You could easily think they were for completely different markets.

So why is this?

Well, in a sense, they are for different markets.

The All Ordinaries is a collection of the top 500 stocks. There is a yearly rebalance. But otherwise there’s no allowance for strength or weakness. You get the best stocks…as well as the worst.

Quant Trader is more selective. The system only signals stocks that meet the entry criteria. This helps reduce 2,000 listings to around 100 companies. It’s like a market within the market.

And look at the result. Quant Trader’s smaller portfolio is doing nicely.

There’s no reason you can’t get this sort of advantage yourself. The key is to buy into strength. This helps avoid weak stocks — the ones that can drag your portfolio down.

It also reduces your number of choices. You can narrow down a field of 2,000 stocks to a select group of possibilities. This can all have a dramatic impact on your performance.

Until next time,

Jason McIntosh,
Editor, Quant Trader

Editor’s note: Each day the markets are open, Quant Trader scans practically every ASX stock for opportunities. There’s a good chance you haven’t heard of some of these ‘hidden’ stocks. And that’s understandable — the ASX has over 2,000 listings.

I’ll give you an example. Have you ever heard of Catapult Group [ASX:CAT]? It’s an athlete analytics company that makes wearable technology for elite sportspeople. Quant Trader gave a buy signal in February. The stock is already up 65%.

Anyone can get gains like these. It’s all about having the right strategies. You can learn more about these here.

All charts are sourced by Quant Trader unless otherwise stated.

Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.
Jason McIntosh

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