What is The Stock Prospector?

The Stock Prospector is an online trading publication available to average investors worldwide.  The Stock Prospector provides buy and sell signals on widely-held securities, prior to the opening of US markets.  Buy and sell signals are automatically generated by a mechanical trading system which uses proprietary technical indicators.   The Stock Prospector is designed to supplement existing research by providing short-term market signals for position management and hedging.

How does your mechanical trading system work?

The mechanical trading system has predefined trade entry and exit rules.  At US market close, closing prices and proprietary indicators are evaluated to identify whether entry or exit conditions have been met.  The system uses market-on-open orders for the next trading day, to close open positions and enter new orders.  All trade signals are generated by the trading system and no part of the system is subjective.

What are the advantages of mechanical system trading?

The primary advantage of system trading is that it provides investors with an unemotional, rules-based, decision-making process.  The benefit is that a rule based decision making process can be tested against historical price data to determine profitability.  Subjective approaches cannot be tested; and, therefore, cannot be proved or disproved profitable.  Another major benefit of a mechanical approach which uses technical indicators, is that investment decisions are not influenced by rumor, poor fundamental analysis, news, or questionable accounting practices.  Human emotion, consistently cited as a major contributing factor to poor investment performance, is eliminated.  

What indicators do you use?

The system indicators are proprietary.  In general, the indicators were developed to evaluate mean reversion and trend identification.  Entry conditions are signaled when a securities price has achieved oversold or overbought levels.  A buy or sell signal is generated when the anticipated reversion to the mean is confirmed by the trend identifier.  Exit conditions are triggered when indicators signal the next reversal.  Because trades are initiated only when confirmed by a trend, we are not always in the market.  We only enter trades when we have the highest statistical probability of success.

How should the average investor use the trade data?

Our goal is to help average investors trade high-probability opportunities in the equity markets and to help manage existing positions by providing short-term market signals to improve on exits and entries.   We have found that the Stock Prospector data has been used by our clients in many ways.  Some examples of client applications include hedging, equities trading, derivatives trading, risk management and portfolio management. 

Do you employ stops or money management techniques?

The buy and sell signals employ stops of 13% (based on the price of the initial position).  We do not recommend using any mechanical trading system without employing appropriate risk control and money management strategies.  Average investors are encouraged to use the system in conjunction with their own risk management requirements. 

What universe of securities do you cover?

The initial universe of stocks we screened came from the Dow Jones 30, the Nasdaq 100, the S&P 500 and the Dow Jones Sector Titans.  

What is your back-testing method?

We use a five-year regression model for initial stock selection.  Stocks are retested monthly to evaluate whether they continue to maintain our standards for coverage.  We strongly believe that the testing methodology used to support a mechanical trading system is a critical element, ultimately determining the ability to achieve consistent long term trading performance.  By using the five-year regression model, securities are back-tested across a complete market cycle.  We believe that a mechanical system must be robust enough to trade profitably through trending and nontrending markets, regardless of bull or bear market cycles.  Each security selected meets this requirement.

How do you mark to market? 

All securities are marked to the opening price on the primary exchange where they are traded.  For example, IBM is marked to the opening quote as reported on the New York Stock Exchange. 

Do you plan on making the market approach available to clients?

Not at this time.  The Stock Prospector is a proprietary product that we are offering to average investors on a subscription basis.  We are looking into the possibility of developing software to complement our subscription service.

Does your model include slippage in commissions?

Our model does not include slippage in commissions.  Because our clients use our signals in different ways -- some executing trades against the underlying security, and others against a derivative -- it is difficult for us to estimate slippage and commission.  Clients are better suited to estimate these elements.