Price Move Required for an AIM Stock/ETF Transaction
The AIM algorithm will calculate the quantity to BUY or SELL at any
price you are interested in, if any transaction at all is indicated.
That depends not only on the Portfolio Control (PoCo), the Stock
Value (SV), and SAFE (derived from SV), but also on the minimums you
have set as to transaction size and quantity size.
The AIM Calculator Program calculates the quantity at various prices,
giving "classic" or "by-the-book" (BTB) results if you set the
commissions to zero ($0).
There is a price "hold zone" or "no transaction zone" between the
first possible (minimum) BUY and the first possible (minimum) SELL
where the AIM algorithm says you should not make a transaction.
The AIM Calculator Program will indicate if you are in the "no
transaction" zone. It will also calculate the first possible minimum
BUY and SELL transactions outside of that zone for you.
******
The question is:
Do you want to take the minimum BUY or SELL
transaction that is possible?
NOT NECESSARILY!
You will want to wait for a larger move more often than not.
******
First, take a look at Lichello's main $1,000,000 example -- the
10-8-5-4-5-8-10 cycle. That involves fairly large moves.
10 to 8 is -20%
8 to 5 is -37.5%
5 to 4 is -20%
4 to 5 is 25%
5 to 8 is 60%
8 to 10 is 25%
10 to 4 is -60%
4 to 10 is 150%
You can see why AIM requires volatility. You can also see why,
though gains using AIM judiciously can be substantial, "grand theft"
money isn't likely to be very common.
Lichello derived AIM back in the late 1970s, before personal
computers and spreadsheets. So, he assumed that AIMsters would check
the stock price just once a month, say, and see if a transaction was
warranted. He assumed that if a transaction was warranted, that the
move would likely have been substantial. If so, AIM works like a
charm in that case.
Now, in the 21st century, we can calculate rapidly the BUY or SELL
amounts for any price. Using my AIM Calculator Program, you can not
only do that, you can calculate and print out a whole list of prices
and quantities for any price increment and range you care to look at.
And, with on-line brokers, you can put in GTC limit orders for
whatever prices and quantities you come up with.
So, the thought was, it appears that today, trading more often, as
soon as a trade is possible, not waiting a month to see, would give
superior results.
Just calculate the minimum next BUY and SELL orders, put in GTC limit
orders with the broker, and wait. You might get several transactions
in a month. Does (will) it work? NO! The result of that,
unfortunately, would be massive LOSSES. (I did some spreadsheet runs
to determine that.)
Why doesn't taking every possible minimum move work? It has to do
the quantities bought vs. sold at various similar price levels.
ALSO, IMPORTANT TO CONSIDER, IS THE NET PRICE PAID AND RECEIVED
FOR THE SHARES TRADED. COMMISSIONS ARE IMPORTANT, NOT ONLY FOR
VERY SMALL ACCOUNTS, BUT FOR MODERATE SIZED ACCOUNTS AS WELL.
My AIM Calculator Program shows you the NET price, considering
the commission, for a given quote/transaction price.
Taking every possible move results in selling too much too soon, and
in buying too much too soon, depleting your Cash Reserve (CR), as
compared to waiting for larger moves.
There is a balancing act required here. If you wait for larger
moves, you will miss transactions. But if you take all possible
moves, you will lose money over a series of transactions.
******
FWIW
Below are my rules of thumb
to balance these considerations
******
Using these rules requires using my AIM Calculator Program to print
out a range of prices, and corresponding quantities. The printout
also gives you, for each quote/transaction price, the percentage
difference in NET prices between that corresponding to the possible
quote/transaction prices and a previous NET price you enter. (The
NET price of the previous transaction.)
First transaction, BUY or SELL, following the AIM Account (AC) setup:
Take the first possible transaction, or
Take the transaction giving at least a 10% difference in NET
prices,
whichever gives the largest quantity.
A reversal transaction (last transaction was a BUY, and this would
be a SELL, or vice versa):
Take the first possible transaction, or
Take the transaction giving at least a 10% difference in NET
prices,
whichever gives the largest quantity.
2nd BUY or SELL in a row:
Take the first possible transaction, or
Take the transaction giving at least a 15% difference in NET
prices,
whichever gives the largest quantity.
3rd and subsequent BUYs or SELLs in a row:
Take the first possible transaction, or
Take the transaction giving at least a 20% difference in NET
prices,
whichever gives the largest quantity.
By "taking a transaction", I mean putting in a GTC limit order for
the calculated price and quantity.
After you have a SELL, you will need to calculate not only a new
SELL, but you also will have to recalculate the potential BUY. And
vice versa.
******
NET PRICE CALCULATION EXAMPLES
******
Trans Price: $9.00 Trans Price: $11.00
Qty Bought: 105 shares Qty Sold: 95 shares
Gross: $945.00 Gross: $1045.00
Commission: 12.00 Commission: 12.00
Net: $957.00 Net: $1033.00
NET PRICE: $957.00/105 = $9.11 NET PRICE: $1033.00/95 = $10.87
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Copyright (C) 2004 - 2006 David A.Bean
buylow-and-sellhigh
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