CAPITAL RESTRICTIONS WITH NON-LEVERAGED TRADING

Excerpt from Adaptive Analysis by Nick Radgewww.thechartist.com.au

In the late 1990’s, before the days of CFD's , when the market wasextremely bullish on the coat tails of the U.S. technology boom I cameacross the problem of having too many trading signals and not enoughcapital to trade them all. I needed some type of filter that allowed me tohave an educated guess as to which of the stocks might be a betterperformer should they both be winners. I named the filter Bang-for-Buckand it eventually found its way into the Metastock User Guide as well asseveral published trading books.

Stock selection without leverage has one serious drawback; buying$10,000 of BHP is very different to buying $10,000 of a sub-$10 stockand you will therefore find that capital usage in higher priced stocks isinefficient compared with lower priced stocks. A good exercise to provethis is to compare the price range of the stock over the last 200-days withits current price. Example:

BHP has a 200-day price range of $0.32 with a current underlying priceof approximately $21.00. Using $10,000, you could buy 476 shares withan expected profit of $152 per day (0.32 x 476).

Compare this to EPT that has a 200-day price range of $0.035 with acurrent underlying price of $0.44, which enables us to buy 22,727 shareswith the $10,000. Here the expected daily profit would be $795 (0.035 x22,727).

In this example we’d get more “bang for our buck” by buying EPT andnot BHP. So if I get a buy signal in EPT and one in BHP, I’d be bettertaking the EPT trade and foregoing the BHP.

The Bang-for-Buck simply filters the relative volatility of the stock incomparison to its price. As I pointed out above, buying $10,000 worth ofBHP is very different to buying $10,000 worth of EPT. You may get theBHP trade correct but based on the capital used the results will not beoverly efficient. We need to get our monies worth and we need to make

profits with the least amount of work. You’d better off, over the long-term, to just concentrate on the EPT type trades.

To calculate the Bang-for-Buck filter, in layman’s terms, divide a$10,000 account by the closing price of the stock on any given day. Thisnumber is then multiplied by the average range of the stock for the last200 days. The average range is the distance the stock has moved fromhigh to low each day over the last 200-days. Dividing this number by 100will convert the result to dollars and cents which inturn indicates thepossible dollar return on any given day. The higher the ratio, the higherthe profit potential and therefore selecting higher ratio's will enable stockselection with potential for movement, which is what we want.