There were however two interesting lessons from the Trade Ideas of yesterday:
1. All of the 10 ideas closed higher than the previous day's close. This might make us wrongly believe that the system for selecting trade ideas is excellent. This is not the case: the system buys stocks that are relatively cheap and sell stock that are relatively expensive. Hence, in a general market that opens on a gap, relatively cheap stocks will also open on a gap. This is exactly what happened yesterday.
What is more interesting to see is that
- four of the 10 ideas closed relatively higher than their opening price,
- two closed relatively lower than their opening price and
- four closed at about their opening price
This tells us that the stock selection system carries some slight advantage, but not more than that!
This also tells us that market direction is very important even when trading individual stocks.
2. We can note that two short ideas triggered and that both ideas experienced closing prices lower than the trigger price. This tells us that we should look for weak stocks that are bouncing in shorting area.
Hence, the list de trade ideas for today carries many more short than long ideas.
You will note that ADM/TEX are two short ideas of previous weeks: I bought puts on these two stocks before earnings and lost money on both. Trading earnings releases through options is not such an easy proposition.