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5 HOW THE TRADING INTERVAL AFFECTS PROFITS We will now see that there are two vitally important parts that the concept of "trading" under the assumption of improved timing plays in achievmg profit-optimization goals. Each of these has to do wdth the trading interval. Turn your attention now to Figure I-l. Here is a typical "high-low" chart for Alloys Unlimited. The total range of the chart for about one year is from 12 to 49 3/4. Suppose you had $10,000 and were astute enough to pick up the stock in November 1966 at 12. Holding it through December 1967, you then sell it at 49 1/2 and sell short at the same price. You cover your short in March of68 at 32 1/4. With this ideal transaction timing (never achievable in practice), you would net $44,780 in profit on a S10,000 investment in 70 weeks for a yield of 333% per year. As lovely as this sounds, lets try something else. Look at Figure 1-2. This is the same chart with a few curvy dotted lines and additional points on the chart emphasized by symbols. Looking at the curvy lines we see that during the time you held the stock foer the previous transaction there was a number of price trend reversals. Each significant high and low is denoted by a letter on the chart, associated with the price of the stock at that time in points and eighths. Now suppose that you bought the stock at A (at 12) then sold and sold short at F (39 3/8). You cover your short and buy again at G (30 5/8), then sell and seU short at J (49 3/4). Fmally you cover your diort sale at (32 1/8). What happens to profits? Four transactions were required instead of two as before, but you netted $75,690 after all transaction costs, instead of 344,780. The yield is now 562% per year on your $10,000 initial investment. Lets go a step further. Buy at A (12) then sell and sell short at (23 5/8). Cover the short and buy at (18 1/8), then sell and sell short at D (32 3/4). Cover this short and buy again at E (24 5/8), then sell and sell short at F (39 3/8). Continuing in this manner to K, you will find ten transactions to be completed. But this time you net $290, for a yield of 2150% per year on your money! ¸- Lets summarize. Over the same total time span, trading in the same stock, assuming the same ground rules of perfect transaction timing (to permit comparison): Two trades netted 333% per year Four shorter trades netted 562% per year Ten still shorter trades netted 2150% per year Now were getting close to the real reason why improvement m transaction timing is worth all the effort we can put mto it. Even discounting the effect of the unrealistic assumption of perfect timing in the examples, the timing improvement that made the 10 trades possible is well worth striving for. And it all comes about because impmved timing permits shortened trades! The impact of trading interval is a dual phenomenon that holds true for all stocks. Assuming accuracy of transaction timing, you will always make more money by short
42 40 AJJUWS UNUMITED 32 26 24 22 20 14-12 1966 067 7 6 ; A Typical Weekly Ili-Low" Chart
> $ UNLIMITED 42-0 32-e.IV 23-5,a \ IW2-I FIGURE 1-2 ce-i / A.t2-0 Ideal Transactioii Timing
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