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Process of Analysis

A unique blend of Fundamental Analysis and Algorithms

The superior success of our recommendations is based on a unique blend of fundamental analysis and a proprietary algorithm that identifies trends and their reversing points. Using fundamental analysis we find where to invest, and using algorithm, we decide when to invest.

1. Fundamental Analysis: The main aim of our research is to identify stocks with exceptional fundamental strength - so that not only they survive recessions but also gain the most from economic growth. 

We are flexible in approach and use top down as well as bottom up approach in stock selection. Our stock selection is based on our views of domestic as well as global economies, long term opportunities, secular trends, and cyclical as well as structural risks. 

Portfolio stocks are selected with toughest screening criteria –

  • Conviction of scalable, long term sustainable growth
  • Backed by a strong secular trend
  • Financially sound, low debt, high margin companies
  • Having strong entry barriers
  • Leaders in their industry, proven management
2. Algorithm based Analysis: An algorithm, or a system, in simplest terms, is a set of rules. One follows these rules to find the best buying/selling point of time. The algorithm that we have developed is based on concepts that are somewhat akin to the now ancient Dow theory. It works on the trend following principle to calculate underlying trends in a security. The concepts used by us are in existence for nearly 100 years but those concepts by themselves do not help in deciding when to buy and when to sell. What makes it work for us is our algorithm that has ability to correctly calculate the underlying trends – both, primary as well as secondary. It has been generating highly accurate trends since 2013 (as you can see in the Performance page).
 
Benefits of algorithms: There are huge benefits of using algorithms, the major ones are -
  • It completely removes emotions and subjectivity from analysis. In fact some of the best trades are those that your emotions tell you not to take..
  • When you do not use emotions and your decisions are based on a set of rules, you can expect similar performance all the time. And over a period of time, you will come to know of its accuracy level and can anticipate success rate.
  • One can take contrarian decisions with confidence, can easily go against the herd.
  • It is analogous to a casino. Not as the player (gambler) but as the owner, who knows that over time the odds are in his favor.
  • It brings some certainty in an uncertain environment.

There is nothing secretive about algorithms, many experienced people in this field know it, but the problem is to actually make an algorithm, that really works!

A truly reliable and robust system must work in all kinds of markets and with all kinds of securities. Our strength is that we have been showing the successful results of such a system to public since 2013. 

Using the algorithm for finding right entry/exit time:

  1. Calculate Underlying Trends – Using our proprietary algorithm, we calculate and draw the underlying primary and secondary trends of the security [See Chart 1 below]. To understand Dow Theory, Click Here.
  2. Trends for Traders V/S Trends for Investors - We choose different time periods for investors and traders. A weekly or monthly chart will generate large trend cycles lasting several months or may be years whereas a daily chart will produce trend cycles lasting few days or weeks.
  3. Identifying Entry and Exit Signals – Once a trend has been identified, it is relatively simpler to identify the three Dow theory stages of bullish and bearish phases (for details, see links below). These stages appear in both, longer duration charts meant for investors as well as shorter duration charts for traders.
  4. Refining Signals – Optimum long entry points would be those when the primary trend is up and the secondary trend is at accumulation stage (bottom). Similarly, optimum short entry points would be when the primary trend is down and secondary trend is at distribution stage (peak). To ynderstand what are optimum combinations please follow this Link.
  5. Trend Following – The best time for investors to enter is when the primary trend is at bottom and the best time to exit is when it reaches top. Most people just keep up holding the stocks in belief that markets may soon turn up. They end up losing huge sums when markets stay down for long periods. For traders, when primary trend is up, we prefer only to go long and avoid shorts and similarly when primary trend is down, we prefer to only short.

Understanding Algorithms:

Beginners can understand systems and algorithms by reading these two interesting documents -

  1. System Trading
  2. Notes on Trading Systems

Chart 1 – Example of a calculated Primary Trend in Dow Jones long term chart meant for investors

 

This example shows our calculated primary trend for Dow Jones Index. We had forecast Dow Jones Index buy entry near 15300 in 2013 and exit near 17800 in 2015 (See Performance page for links to both entry and exit posts). The red line shows calculated primary trend which turned up in late 2012. There was also a secondary trend (not shown here) that turned up in November 2012. Since we had started our free forecasting blog in May 2013, so we mentioned that it is still a buy position (in May 2013) as the trends were indicating that it should last for about 2-3 years.