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Computerized Investing > Fourth Quarter 2010

A Hybrid Technical-Fundamental Stock Trading System

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by Wayne A. Thorp, CFA

This is the third in a series of three articles outlining the stock trading models described in Grant Henning’s book “The Value and Momentum Trader” (John Wiley & Sons, 2010). The first article outlining Henning’s technical-momentum trading model was the August 2010 CI Online Exclusive, and the second covering his fundamental-value trading model was the September 2010 CI Online Exclusive.

Grant Henning, a college professor turned full-time trader, believes that following a quantitative, mathematical ranking system to select stocks is a good way to remove emotions from the investment process. Depending on where we are in the market cycle, either fundamental-value or technical-momentum strategies tend to outperform. To help alleviate the need to time the market, Henning developed a “hybrid” trading model that merged both fundamental-value and technical-momentum elements into a single system, which he discusses in his book “The Value and Momentum Trader” (John Wiley & Sons, 2010).

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Discussion

Anthony from VA posted over 2 years ago:

"Percentage Lag

The next column in Table 1 is percentage lag (% lag), which measures the degree to which the current share price lags the 52-week high price. It is calculated as follows:

(52-Week High Price – Current Price – $0.02) ÷ 52-Week High Price

To avoid the problem of dividing by zero if the current price and the 52-week high are both the same, Henning arbitrarily subtracts $0.02 from the current share price. Doing so, we discovered, also leads to the potential for a negative percentage lag value. Keep this in mind while performing your own analysis."

This is incorrect. The only way to have division by zero is if the 52-Week High Price is zero. The 0.02 factor is useless.


Richard l. from IL posted over 2 years ago:

That's true, Anthony, but it does avoid dividing by zero in the next step, Investment Value. I prefer to check for zero values, rather than add $.02.

I built a spreadsheet to do the Henning system's calculations to help me screen the Stock Superstar Recommendations and found NONE of them pass muster.

ALL the current Recommendations fail the very first test, "52-week Multiple", with Multiples under 2! I am surprised none of these supposedly "super" Recommendations even made it through the first screen in this system.

Dick


Wayne from IL posted over 2 years ago:

This is a trading system, whereas SSR is an investment strategy with a longer time horizon. Since we are taking a longer term view with SSR, price momentum is not a primary concern, unlike Henning, who is a short-term trader.


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