Hi JF, Re: Trade frequency and AIM performance.......................
AIM works as a volatility capture device. Internal settings such as the total SAFE value and the minimum order size relative to core holding determine the amplitude of price change between a buy and a sell (and the opposite). I refer to this as the Lichello Band - it is the hold zone where no trading occurs. Once an AIM directed trade is made, the Lichello Band shifts either upward or downward (from Selling or Buying).
The frequency of the price changes is independent of the amplitude. One could have high frequency of price reversals but not enough amplitude to trigger trades or low frequency of large amplitude and get strong trades. There is a sweet spot we can estimate that will maximize the number of trade events over time for the largest LIFO gain. For instance, if we set SAFE to be 10% on buying and selling and 10% of Shares to be the minimum trade size we'll come up with a Lichello Band width of nearly 40% from a buy to a sell. Then we can look back over history to see how frequently the price has moved at least that amount as to trigger a trade. A friend showed me the Zig Zag lines on Stock Charts and how it can be used to get a feel for such things over time. Here's Ford (F) for three years and various Zig Zag thresholds which can be used to approximate the Lichello Band for various SAFE and Min Order settings.
1) Total SAFE of 20% (10 Buy and 10 Sell) plus 10% of shares minimum Order size
(roughly 40% ZZ)
These settings would have generated just one buy and one sell over three years. We don't know if the conditions will remain the same for the future, but it gives us a feel.
2) Total SAFE 20% plus 5% of shares minimum Trade size...
(roughly 30% ZZ)
Even by dropping the Lichello Band width from 40% to 30% hasn't increased the trade frequency. It would generate the same number of trades. Note, one could have reduced the total SAFE or the minimum order size to accomplish the Zig Zag results.
3) Total SAFE = 15% plus 5% of shares as minimum trade size
(roughly 25% ZZ)
With 25% Zig Zag we improve the trade number by one event, a sell that then was followed by the next buy and sell. So, here we've captured one more profitable trade and another round trip.
4) 10% total SAFE plus 5% of shares as minimum order size....
(roughly 20% ZZ)
When we drop the Lichello Band width to just 20% we see a remarkable improvement in the number of reversals and profit opportunities. It jumps from 2 sales events to 4. While LIFO dropped from 25% to just 20%, we doubled the number of 20% LIFO turns so this would have been more profitable from trading.
This exercise can be continued to smaller Lichello Band sizes. Smaller LIFO round trips mean less profit per cycle. So, the number of cycles has to increase at a rate greater than the reduction in profits per round trip.
Note none of this relates to frequency of AIM updates. These examples are for reaching the Amplitude thresholds, no matter how frequently they occur. If we checked AIM daily we'd not have had any more trades than if we checked monthly most likely.
My experience is that it is better to calculate the Next Buy and Sell targets and set GTC Limit Orders in place for those targets. Then, if a trade happens in a day, week or several months it doesn't matter. The "When" is taken out of the equation and just the "How Much" is in control. This frees up a lot of time to keep track of the fundamentals of the company in question knowing the "timing" will take care of itself.
Of the four examples above, I would select the 20% Zig Zag model and use 10% Buy SAFE, Zero % Sell SAFE and 5% minimum share transaction as the settings for calculating the Next Buy and Sell targets. Round trip profits are reasonable and trading costs are nominal assuming a total investment of say $10K in the chosen stock (roughly a $500 transaction with a $5 to $8 commission). The larger the core holding value, the lower the transaction cost will be as a percentage of trade value.
One last thing: I usually limit sequential buying to once in 30 days. Cash is limited and can be exhausted. Shares, with AIM are always available for selling, so one can't run out of shares. So, to protect the cash side from being depleted too quickly, I set a 30 day clock as a delay between sequential buys. If we get a buy and then a sale, that stops the clock and we can buy again as soon as the target price is met.
Let me know if this helps.
Tom
More on AIM and Hold Zones and Lichello Bands:
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