Stock market anomalies occur every day, and if you knew where to find them you could enjoy outstanding returns year after year.
Question:
Would the following trading idea have been profitable in 2008?:
- Every day at market open, buy the two S&P 500 stocks that lost the most percentage points the previous day
- At market close, sell those 2 positions
Answer:
Percentage gain/loss of above scenario
There would have been 504 stock purchases with only 2 positions open at any one time, and if you had bought a fixed dollar amount of $1000 of each stock, by December 31st 2008 you would have gained $628, even though 2008 was a very bad market for stock buyers overall.
If you have a curious mind you are now probably wondering:
- What if I held the stocks for 2 days, how about 5 or 10?
- What if instead of buying the worst percentage losers I bought the best percentage gainers?
- What if I shorted the best percentage gainers?
- What if I forgot about the very extreme gainers and traded stocks in the upper gain bracket?
- What if I only traded stocks that met my price and volume criteria?
Answering questions like these will lead you down the path to designing a great trading plan and becoming a profitable trader.