INDICATORS
Advance Issues Momentum
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 range-bound; 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-of-day (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.
PICKING A SYMBOL BASKET
The basket of symbols you select depends on the instrument to be traded.
The basket should be a good representation of the market to which the instrument
belongs. In this article, I will use the components of the Dow Jones Industrial
Average (DJIA) as the basket. With 30 components, the basket size meets
the minimal requirement for sound statistical data collection.
Figure 1: AIM with 20-day momentum. Note that extreme readings
approximately coincide with turning points.
...Continued in the August issue of Technical Analysis
of STOCKS & COMMODITIES.
Excerpted from an article originally published in the August 2004
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2004, Technical Analysis, Inc.
Return to August 2004 Contents
