Stock Market Data Calculations - Trading Stocks On The Rise - A Quick Study By Alan Goosedanger At Isnare.com Ezine Articles

Anyone who watches the stock market has seen (almost on a daily basis) stocks that rise a significant and enticing amount. You can't help but wonder "How can I get in on this? - I would be set for the month" (or week depending on what you expect from trading). Before I continue I must explain that this concept is day trading in its purest and riskiest form. However, it is terribly tempting to contemplate, so lets explore the numbers to see if we can find some answers to this question.

To start we need a more specific question - lets entertain the example question: If a stock goes up say 3% one day and then 5% the next, what does it do the third day?
(This question was not chosen at random, various attempts at this calculation have shown that these values over a 2-day range provide the most, and therefore steadiest, data. I also think it is the most intuitively reasonable question for exploring this type of data).

The answer is:87% (972 out of 1117) of occurrences had an average gain of 7.5% and a median of 9.5%
(6 months of data up to Feb. 22, 2008, 4493 stocks reviewed, next day value on high not close).

A great answer! But don't start thinking you have found the holy grail of stock trading - it is fairly misleading - I'll tell you why:

First: This study is flawed in the way it is performed as it only includes stocks that increased GREATER THAN 3 and 5% (not equal to or about), so it doesn't differentiate between stocks gaining, for example, 4 and 6% and those with 11 and 9%. Also, it does not include a statement that the stock does not gain on the day before (the 3%) to eliminate stocks that have been rising for over 3 days in a row and remove redundant data.

Secondand more importantly: This data cannot be taken at face value because it does not take into account 2 major factors which are necessary if we actually want to achieve these gains.

1) If the stock in question move with enough volume, at a high enough value, so a trader can get in and out at these prices.
2) If the trading occurred after hours or was the high so brief that a trade could not actually be performed.

To eliminate some of these factors I can refine my study by including some limiting factors:

- Close to open values are the same on the day in question (eliminates after hours trading)
- The stock did not gain > 3% on the day before (eliminates stocks increasing for more than 3 days)
- Average trading Volume > 50,000
- Average value > $1.00

The (better) answer becomes:65% (134 out of 206) of occurrences had an average gain of 5.9% and a median of 4.4%.

This provides slightly less exciting results, and it does not eliminate all the factors that may make this type of trade hard to accomplish (also the sample set has greatly decreased), but the results are still encouraging.

(My) Conclusion:

Don't attempt this type of trade unless you are willing to risk everything for a potential 5% gain!

However, these numbers show that profit by this method is obtainable and the overall odds are in the traders favor. This short study is in no way a scientific or reliable study of this type of behavior. Results would likely vary if it was repeated a month or so from now. However, it does show a small sample of what the market is doing currently, and that this type of trading may just have some merit.

If you decide to take action on this data, I would advise you do your homework and practice, it is not for the faint of heart. One further word of caution (although I could give many): the prudent investor must know when to get out; these types of gains usually don't last for long.

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