Thread by @aksmtr

New #TradingStrategy: 𝐀𝐜𝐜𝐫𝐮𝐚𝐥 𝐀𝐧𝐨𝐦𝐚𝐥𝐲

In 1996 Researchers found a very interesting relation between a company's accrual and its stock performance.

YOU can use it to make PROFIT.

A Thread 🧵👇

But first what is Accruals?

When a company sells some goods to customers, customers may pay them immediately (in cash) or in the future (receivables). 

In the accrual systems of accounting, we register them as earning.

So, earning = cash + accruals

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As you see, not all earnings are same.
Example, company X and Y both have earning = $10. But their earning components could be very different. E.g.

EPS Cash Accrual
Comp X $10 $6 $4
Comp Y $10 $2 $8

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You might be asking, so what? What does it got to do with #trading?

Well, in 1996 researchers (Sloan et. al.) found a very interesting relation between a company's accrual and its stock performance.

Companies with high accruals have lower subsequent stock performance.
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Researchers found, firms with lower accruals are connected with real earnings. On the other hand, firms with a high accruals could be due to some accounting practice.

So, stocks with low accruals earns higher subsequent market returns than high accruals stocks.

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Now we can build a #tradingstrategy with this knowledge:

1. Take all the stocks in the index
2. Calculate accruals for each one using: ACC = ∆CA – ∆Cash – ∆CL
3. Sort the stocks by accrual amount (LOWEST to HIGHEST)
4. LONG top 5 stocks & SHORT bottom 5 stocks

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Just to explain the accrual formula above, here are the terms and their meanings:

ACC = ∆CA – ∆Cash – ∆CL
where,
∆CA = annual change in current assets
∆Cash = change in cash and cash equivalents
∆CL = change in current liabilities

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So, does this formula work in Indian Stock Market?

This formula not only works, it has been thoroughly used and exploited by the institutional investors for a long time. And it is being used heavily even today for algorithmic trading (#algo) in US and other markets.

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The best thing about this strategy is - it is simple to implement and automate programmatically.
But even if u do not know programming, the system can still be used very easily for trading.

If u are interested in such trading strategies, please follow me @aksmtr

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