Bang for buck trade management strategy by nick radge the chartist

Stock Trading: Bang-For-Buck Trade Management Strategy

By Nick Radge, The Chartist In the late 1990s, before the days of CFDs, when the market was extremely bullish on the coat tails of the US technology boom, I came across the problem of having too many trading signals and not enough capital to trade them all. I needed a filter to determine which stocks would perform better, should they all be winners. I named the filter Bang-for-Buck and it eventually found its way into the Metastock User Guide as well as several published trading books.

Stock selection without leverage has one serious drawback; capital usage in higher priced stocks is inefficient compared with lower priced stocks. For example, buying $10,000 of BHP is very different to buying $10,000 of a sub-$10 stock. A good exercise to prove this is to compare the price range of the stock over the last 200days with its current price. Example: BHP has a 200-day price range of $0.54 with a current underlying price of approximately $38.00. Using $10,000, you could buy 263 shares with an expected profit of $142 per day (0.54 x 263).

Compare this to ESG that has a 200-day price range of $0.036 with a current underlying price of $0.80, which enables us to buy 12,500 shares with the $10,000.

Here the expected daily profit would be $450 (0.036 x 12,500).

In this example we’d get more “bang for our buck” by buying ESG and not BHP. So if I get a buy signal in ESG and one in BHP, I’d be better taking the ESG trade and foregoing the BHP. The Bang-for-Buck simply filters the relative volatility of the stock in comparison to its price. As I pointed out above, buying $10,000 worth of BHP is very different to buying $10,000 worth of ESG. You may get the BHP trade correct but based on the capital used the results will not be overly efficient. We need to get our monies worth and we need to make profits with the least amount of work. You’d be better off, over the long-term, to concentrate on the ESG-type trades.

To calculate the Bang-for-Buck filter, in layman’s terms, divide a $10,000 (for example) account by the closing price of the stock on any given day. This number is then multiplied by the average range of the stock for the last 200 days. The average range is the distance the stock has moved from high to low each day over the last 200-days. Dividing this number by 100 will convert the result to dollars and cents which in turn indicates the possible dollar return on any given day. The higher the ratio, the higher the profit potential and therefore selecting higher ratios will enable stock selection with potential for movement, which is what we want.

Nick Radge has been trading using short term swing trading methods plus longer term trend following strategies since 1985. You can find out more about Nick Radge at www.thechartist.com.au