The smaller the value of D the closer the proximity of the two stocks.

Just a simple scatter plot in Excel is usually quite adequate and a lot simpler.
Please
see examples on the CD in the CLUSTERING file for an indication.
Some concluding driving directions:
You want to partition your stocks so that data that are in the same cluster are
as
similar as possible.
You want to achieve maximum heterogeneity between clusters symbols that
belong to different clusters should be as different as possible.
As shown in the example above, using only one easily calculated metric is quite
an adequate tool, even when used very lightly without the rigorous math.
Please be aware that a really crisp and clean cluster assignment is not always
possible and we have to make do with the best that is available. Much of the clu
stering
will tend to be related to sector membership.
Just in case this methodology has wetted your mathematical interests Wishart
(1969a) has developed a method seeking disjoint density surfaces (regions) in th
e
sample distribution which he named Mode Analysis. This is really just a much more
powerful but complex clustering method.
The search through the data is made by a sphere of radius R surrounding each
data point and then counting the number of points which fall in the abovemention
ed
sphere. Individual data points are then labeled as dense or non-dense depending on
whether their spheres contain more or less points than a linkage parameter, K whic
h
depends on the magnitude of the dataset. (Wishart (1978) suggests some possible
values for K.)
If you really get stuck in the clustering space there is no shame in resorting to
clustering software to help do the job. We have used the software package Clustan
.
David Wishart created it and has always been most helpful: www.Clustan.com.
Department of Management, University of St Andrews.
We have not used these but they are highly recommended: www.ncss.com and
www.visumap.com.19
Selecting a Cohort
of Trading Stocks
This chapter lists our first preferences in stock sectors we have experience wit
h.
The full Watchlist of stocks, most of which we have traded, together with some
basic outline information and company descriptions you will find in Appendix B a
nd
Appendix C.
We have our modified industry sector list in Appendix A.
Our definition of a cohort: Symbols which we have found to have similar trading
characteristics when they are defined by our metrics.
Here is a first, cursive narrative routine to get you started. The file COHORTS
on the CD lays out the routine in Excel.
The Price Tier metric is our first port of call. If there is sufficient capital
in the
account we have found that we have had more success trading the higher priced
stocks. We speculate that the higher priced stocks have a totally different owne
rship
profile to that of the lower priced stocks.
Trade 500 share lots as a stop gap if there is not enough cash in your trading a
ccount
to comfortably cover at least two 1000 share trades at the same time. A reasonab
le
start is to pick a stock in the $75 to $100 list.

Price is only one of many dimensions on which we can fingerprint a stock and
connect with its trading characteristics.
The volume level metric is the second stop on the tour. We are using volume here
as a proxy for liquidity. Do not trade any stock which has a three-session avera
ge
share volume of less than 1 million shares per day or has one of th