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So why did we start doing a Leaderboard?
The Leaderboard helps up keep track of the top performing companies one year historical price performance. The most basic concept of technical analysis is drawing a line through two close prices and calculating an angle of price movement over a period of time. Our time that we chose to sort the above list was one year. One year is like forever in the trading world. Not many of the daily traders look past the 200 day moving average. Because the percentages on the list under the heading 'Performance (Year)' essentially represents Return on Investment (ROI), this number is key to investors. Why is this important to know? Investors have the ability to increase the net worth of a company causing its valuation to go higher. There are many factors that affect how one decides to place his or her money in a certain place over a given period of time. The important thing to remember is these percentages shown are representing the best in the market at this given slice of time. You need to analyze the price position in relation to moving averages to help gauge a shorter term price range probability.
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How did the Leaderboard evolve?
The Leaderboard started including every single company under the sun, no matter how small. The yearly returns of the leaders were ginormous. It was attractive. We liked looking at the large gains thinking if we only owned one of them, we would crush the performance of the market. The problem was, unless you were that one investor last year that threw all your eggs in one basket at that precise moment 365 days ago, you are not getting that return. In fact, our Reality Consultant further confirmed the dangerous technique of blindly buying ten stocks on the list. The yearly performance was a loss of almost 30%. So what went wrong? Well, first off, the small cap companies making the top of the list were pushing to their highest valuation ever in most cases. This means our Reality Consultant was buying in at a very high price point in the yearly price range.
The second problem was the stocks were mostly small cap stocks. With the exception of Palo Alto Networks, all the stocks were below the Two Billion dollar Market Cap. So whats wrong with the little guys? Small cap stocks are highly volatile and trade on lower volume. Why does that make a difference? Well, volatility is the measure of change, in our case its the change of the price of the security. When the volatility of a price is high, there is a greater risk to you as the investor or trader. The higher the volatility, the larger its anticipated price range on both the higher and lower end. The sale of the security is dependent on the Bid Price. The Bid is what someone else will buy it for. The Ask price is what you pay. The Bid and the Ask are very similar for Large Cap stocks, however not so much for small cap stocks. This means, when we purchased the underlying securities, we had already lost money in the transaction just based on the spread of the Bid and Ask prices.
This is why we now filter the list based on certain criteria listed at the top of the page. Although this strategy appears to limit gains, we believe it is actually raising the lower end of our performance range.
The breakout candidates are stocks whose current close price is within one to two Average True Range's (ATR's) of their six month high daily close. We believe strictly statistically speaking, these stocks have the highest probability of moving higher in the next weeks and months.
The psychology of trading is something to fully understand before using real money, but as Warren Buffet has said "If you're not prepared to lose 50% or more, you shouldn't be investing in stocks." The name of the game is to establish a price range over a given period of time first, and then estimate a future value.