Q..........
Tom -- I discovered your site through a review of Lichello's book on Amazon. Amazing -- I had the 1992 issue and was just looking to see if a revision available.
I'm thinking of using AIM to manage a non-stock/non-mutal fund porfolio. The problem is bid-ask spread. Have you or others done/considered factoring in the bid-ask (and/or commission) into the buy-sell equation?
Say today's price is quoted 45-50. When you value your holdings, and when you sell some, the price is 45. But when you buy some back, the price is 50. It doesn't seem to me that you can just say it's 47.50 and neglect the bid-ask spread. And the same with commissions, though to a
lesser extent of importance.
Dave
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A..........
Hi Dave,
Thanks for the note and the interesting question. AIM will work with a large Bid/Ask spread, but it will certainly have an effect on the frequency of trades. One needs to build into SAFE the excess commissions and the usual
spread of an issue that has larger than normal ranges.
In normal equity trading Mr. Lichello's SAFE value of +or- 10% (20% total range) is plenty to cover commissions and also typical spreads of an eighth or quarter. When you start going off into other areas where such expenses are larger, then it makes sense to expand the SAFE value to cover these expenses and still leave you nicely profitable afterwards.
I 'pre-calculate' my next minimum buy and sell prices for AIM. This range normally makes my broker, my "Uncle Sam" and me very happy. In your case you can also do this same sort of exercise. However, with the Bid/Ask range being 20% to 25%, you will need to add this to your SAFE value. So, in your case SAFE would now be 30% to 35%. To be sure you cover everything, use the higher. Once you establish what the trade range is (from a buy to a sell) you can then look at the 52 week price range and see if you would have
generated trades during the last year. This will depend upon the volatility of the underlying security.
If you had the Newport or PCA software, it becomes easy in that you can enter this revised SAFE value and see what the next buy and sell prices will be. You should note that when AIM buys, it lowers the next Sell price. Going the other way when AIM sells, it raises the next buy price target. I refer to these buy/sell ranges as the Lichello Bands at my web site. So, the Lichello Bands will track either side of the price as it changes over time.
If commissions are extremely high relative to stock transactions, then you should also add on the percentage of commissions. If it were to be 5% of the transaction value, then you would add an additional 5% to SAFE.
Please let me know if this method works with what you have in mind. I'm curious to know how far the AIM algorithm can be stretched and still work!
Best regards, Tom |
