Stock market anomalies occur every day, and if you knew where to find them you could enjoy outstanding returns year after year.
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
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.