Can Sorting Stocks by Rising Amounts Unveil Profit Potential?

Hi, I regularly scan my technical analysis software, Metastock, to filter out stocks that are actively traded. Actively traded stocks typically attract the attention of institutional investors and fund managers. This article delves into the efficiency of such practices and the challenges in consistently beating the market.

Filtering and Evaluating Stocks

My process usually begins with a volume-based filter, narrowing down a list from about 1000 stocks to around 100. After this, I manually research the fundamentals and monitor recent news to refine my selection further. This approach has helped me manage and evaluate a large number of stocks more efficiently, even if it doesn’t guarantee profitable outcomes.

The Market Efficiency Puzzle

It’s crucial to understand that in financial markets, there is no 'free lunch', no easy way to predict and consistently beat the market. The concept of market efficiency suggests that prices fully reflect all available data, and discrepancies do not persist indefinitely. This means any advantageous strategy based on data is likely to be quickly identified and exploited.

The Sorting Algorithm Trap

Using sorting algorithms to find profitable stocks, like sorting by 'rising' amounts, can be tempting. However, there are significant challenges. Sorting stocks by rising amounts and reviewing their financial reports may appear logical, but the market is efficient, meaning that such patterns are quickly recognized. Given that, here are two algorithms:

Ascending Sort: Sort by 'rising' amounts, then review top 10 stocks and purchase if they look good. Dynamic Sort: Apply multiple sorting criteria like 'falling', 'rising', 'flat', and review a diverse range of financial reports to buy if they appear promising.

These strategies, while potentially intriguing, are also subject to the efficient market hypothesis. If such a strategy were successful, it would quickly become crowded, pushing up prices, and ultimately negating the initial advantage. The market, being efficient, quickly prices in information, making past performance a less reliable indicator of future success.

Strategies and Counter-Strategies

The equilibrium between various market strategies and counter-strategies means that simple sorting algorithms may not provide a significant edge. Many other market participants, including sophisticated computers and algorithms, are always looking for inefficiencies and exploiting them. The teeter-totter of strategies and counter-strategies ensures that the information gap is quickly filled.

Conclusion

Sorting stocks based on rising amounts may appear like a promising strategy, but the efficient market hypothesis suggests that it would be quickly recognized and exploited. Market dynamics and the behavior of other participants need to be carefully considered. Continuous monitoring and a broader analysis of market conditions, rather than relying solely on sorting algorithms, are key to successful trading.

Summary: While technical analysis tools like Metastock can provide insights, sorting stocks by rising amounts is just one aspect of a broader market picture. Understanding the efficient market hypothesis and the competitive nature of market participants is crucial for successful trading.