Indicators  |  AUG 2004

Boosting Profitability by Lawrence Chan and Louis Lin

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.

by Lawrence Chan and Louis Lin