MONEY MANAGEMENT
Going APE
The Average Peak Excursion
by Chris Young
With a multitude of stocks to choose from, how do you know which
ones are the best to trade, and how do you determine the best time frame
to trade them?
AS traders, your objective is to maximize your rate of return
while minimizing risk. Just to make sure it's clear what I'm writing about,
let me define my terms. "Maximize" means that there are choices, approaches,
and systems that give more positive results than others. "Rate" means that
you are interested in the change per unit time - although rather obvious,
we tend to focus too often on change rather than change per unit time.
"Return" means that you want more back than what you put in. "Risk" points
to the understanding that no system is perfect and choices must be made
to preserve trading capital.
That clarified, average peak excursion (APE) is a tool for characterizing
a stock's tendency relative to the terms defined. Using APE, you can:
-
Select stocks that tend to yield higher-trading rates of returns than other
stocks
-
Select stocks for a higher relative reward compared with risk
-
Determine the best trading time frame to maximize the rate of return for
a given stock.
PEAK EXCURSION
Peak excursion is the measure of extreme price movement from an initial
starting point. For my purposes here, I will always use the opening price
as the initial starting point for a given analysis. The one-day peak excursion
is defined as the larger of the absolute value of the high minus open or
low minus open. The two-day peak excursion is the larger of the absolute
value of the two-day high minus the first-day open and the two-day low
minus the first-day open. This process can be seen in Figure 1. The fourth-day
extreme from first-day open is less than the third-day extreme, so the
third-day extreme is used for the fourth day.
FIGURE 1: EXCURSIONS. On the upper chart are the excursions
from the initial open. On the lower chart you see peak excursions from
the initial open. Note that the fourth day extreme from the first day is
less than that of the third day so the third-day extreme is used for the
fourth day.
...Continued in the April issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the April 2006
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2006, Technical Analysis, Inc.
Return to April 2006 Contents
