Boosting Profitability by Lawrence Chan and Louis Lin
Here’s how you can use advance issues momentum to create
an end-of-day trading system with superior profitability.
The stock exchanges broadcast the number of
advancing issues each trading day. This
advancing issues data has proven useful
for analyzing market breadth. In fact, for
many traders it is an essential indicator for
everyday trading because it represents the sentiment of the entire market. For our purposes here, I
will refer to the advancing issues data as broad market
advancing issues, since it represents the advancing issues
of all stocks traded.
Although advancing issues data is a useful indicator, it does have one deficiency. Since it includes all the traded
issues, there may be several not included in the index or
industrial group. Thus, advancing issues of the broader
markets may not be focused well as an indicator. In
addition, broader-market advancing issues are not rangebound;
there are no limits to how high or low they can go.
This makes the interpretation of advancing issues
subjective, which could be a slight disadvantage for
systematic traders. The problem is more severe for end-ofday
(EOD) systems, since the total symbols and composition
of the broad market change.
In this article, I will present a new type of collection
method for advancing issues. This generates a new class of
indicator called advance issues momentum (AIM). AIM is
designed to avoid the deficiencies of the broad market
advancing issues by combining the n-days momentum from
a fixed-symbol basket.