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Computerized Investing > July/August 2008

Trading Rule #1 Stocks

PRINT | | | | COMMENTS (3) | A A   Reset

by Wayne A. Thorp, CFA

In the September/October 2007 issue of CI, we introduced Phil Town’s Rule #1 approach to picking stocks, which involves selecting “wonderful” companies at attractive prices. A summary of Town’s methodology is provided in Table 1 and you can find the original Rule #1 article on-line at the Computerized Investing Web site (www.computerizedinvesting.com).

We also developed a stock screen based on the steps Town outlined in his book, “Rule #1” (2006, Crown Publishers), and clarifying statements he subsequently has made at his blog (www.philtown.com).

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Discussion

Peter from NH posted over 3 years ago:

I find it interesting that checking in on the 8 companies passing the screen run using Mr Town's rules back in 2007 (as reported in the Sept/Oct 2007 CI Issue) that 5 of the 8 are virtually out of business and the other 3 are trading not that much higher than they were 4 years ago?


John from CO posted over 3 years ago:

The formula for %K is either not clear or incorrect specifically, the term

"lowest low over last n period
highest high price in last n periods"

Use of parentheses when operatining on terms such as this help prevent occurrences like this.


Vernon from FL posted over 2 years ago:

John - if it helps, here is the definition from Ambibroker user's manual:

Stochastic Slow
Stochastic is an oscillator that measures the position of a stock or security compared with its recent trading range indicating overbought or oversold conditions.

It displays current day price at a percentage relative to the security’s trading range (high/low) over the specified period of time.

In a Slow Stochastic, the highs and lows are averaged over a slowing period. The default is usually 3 for slow and 1 (no slowing) for fast. The line can then be smoothed using an exponential moving average, Weighted, or simple moving average %D. Confirming Buy/sell signals can be read at intersections of the %D with the %K as well.

The Stochastic Oscillator always ranges between 0% and 100%. A reading of 0% shows that the security's close was the lowest price that the security has traded during the preceding x-time periods. A reading of 100% shows that the security's close was the highest price that the security has traded during the preceding x-time periods. When the closing price is near the top of the recent trading range (above 80%), the security is in an overbought condition and may signal for a possible correction. Oversold condition exists at a point below %20. Prices close near the top of the range during uptrends and near the bottom of the range during downtrends.


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