Institutions are known to undertake a huge amount of analysis when looking at asset allocation and specific stock selection. Depending on the institution, various forms of fundamental, consensus and technical techniques will be employed. Of course, this integrated approach to the market has proven to be one of the most adept at identifying opportunities.
Although integrated investing requires the need for specialist knowledge, software does allow a retail trader (that’s you and I) to quickly sift through various companies and pick out those that match bullish or bearish criteria.
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A neat example of this can be seen above. Simply, on the 6th of July this year, different filters have been applied to all the shares in the Australian market. These filters are various, however a quick description is given below:
- Wave 4 Buy – this is the bread and butter Elliott continuation trade and a high probability trade set up.
- Predictive Play – this is a growth scan which has a strong focus on earnings. Sales are also considered and must be proven to be growing at the same rate as earnings.
- ValueGain Growth Model - The ValueGain Growth Model seeks to find companies with the potential to not only grow earnings but to sustain that growth. Also pre-tax margin must be increasing in line with growth.
- Wall Street Winner - The Wall Street Winner Growth Model supports the idea that price-to-earnings ratios aren't the best indicator of a stock's value, and that small-company stocks, contrary to popular wisdom, don't as a group have an edge on large-company stocks.
- Bullish Trend – the Bullish trend is a shorter term technical tool which combines several trend and momentum indicators in order to categorise those which are trending.
These filters combined to reveal just one candidate to trade. This is not always the case, and some extra decision making always need to be made. A trader should consider basic technical analysis, review the sector and the economy as a whole and even regard his or her own risk profile before pulling the trigger. As it turned out, the one result was United Group (UGL.ASX) and the trade turned out to be very successful. As the chart below shows a standard deviation channel break out was used as the primary entry trigger and stops were incorporated on a volatility basis.
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The entry point (outside of the traditional ProfitSource EBOT mechanism) acted somewhat as a lag on initiating the trade, but the end result was a more conservative entry point, rather than an increase in risk. In addition, the trade component that worked exceptionally well was the trailing stop. As with the Bank of Queensland and Annsell trades I discussed last week, this was pre-calculated using the Volex model.
Using an integrated approach does have a huge amount of advantage over systems that purport to use only one mean of analysis. In some instances (UGL, BOQ and ANN) it can get a trader into more winning positions, but equally important and often less cited...it can keep you out of the bad ones too!