Can Stock Trends be used to trade profitably?... the answer to that question is a most definite yes!
One of the simplest trading strategies you can employ uses the trading signal defined by a moving average crossover, which is exactly what the Stock Trends indicators are based on.
Since its inception, the Stock Trends TSX Portfolio #1 trading strategy has returned some impressive performance numbers – averaging 30% annual returns over the 24 years since it's inception in late 1993 to December 2017!
The trading results of the Stock Trends TSX Portfolio #1 have been extremely successful, especially when compared to the benchmark S&P/TSX Composite Index:
ST TSX Portfolio #1 Strategy Performance - 1994 to 2017:
Nov 11/1993 to Dec 31/ 2017
* ST portfolio annual returns are based on average invested capital for the year.
The Stock Trends TSX Portfolio #1 strategy has shown a negative return in only seven calendar years over the twenty-one year period, and has bested the comparative S&P/TSX index benchmark in thirteen of twenty-one years. Most impressively, the portfolio strategy has produced some of its best comparative results in difficult bear markets!
We've been publishing the Stock Trends TSX Portfolio #1 strategy since 1995, and you can review a history of ALL completed positions (i.e. a position is 'completed' when it it is bought and sold): Trading History
How can you too follow the Stock Trends TSX Portfolio #1 and start benefiting from its consistently successful performance?... simply subscribe to Stock Trends Weekly Reporter for $19.95/mo (or choose one of our money-saving annual subscription plans), and start receiving our weekly ST Portfolio reports by email, where you can follow the weekly transactions and performance of the portfolio. Each week we run our proprietary Stock Trends Portfolio Buy filter to find new acquisitions for the portfolio, and review the current portfolio holdings for our Sell signals. Learn how to build your own portfolio strategy by following ours.
In 1995 we researched various trading strategies incorporating criteria focusing on the Stock Trends indicators, back-testing on TSX trading data. From that research, the Stock Trends Portfolio strategy was born. Since its inception, the Stock Trends TSX Portfolio #1 trading strategy has returned some impressive performance numbers - averaging over 30% annual gains for the twenty three years from 1993 to 2017! During this same time period, the S&P/TSX Composite Index (formerly the TSE 300 Index) has averaged a return of 9% per year.
The success of any trading system depends on a number of factors, including a trader's diligence in finding proper trading signals and his/her money management skills. Stock Trends can be used as a tool to help in many varied trading strategies. Certainly, any trading system you decide to use with Stock Trends will be constrained by the parameters of the Stock Trends analysis. For example, the moving average study employed by Stock Trends uses a time horizon of 40 weeks for the long-term trend line and 13 weeks for the intermediate term. A system may require more timely triggers - say the long-term was 26 weeks (instead of 40) and the intermediate-term five weeks (instead of 13) - in which case the Stock Trends indicators would be of limited assistance. But there are a number of different approaches to managing a portfolio using the Stock Trends reports, some of which have proven very successful.
STOCK TRENDS PORTFOLIO #1 TRADING STRATEGY
One of the simplest trading strategies you can employ uses the trading signal defined by a moving average crossover along with supporting momentum and volume criteria. The Stock Trends Portfolio #1 is based on such a trading system. The trading criteria defined for the Stock Trends TSX Portfolio #1 since its inception in 1993 are as follows:
BUY a stock when:
tagged with a "Bullish Crossover" indicator (), and
weekly volume is above 100,000 shares, and volume of trading is at least twice the 13-week average volume (volume tagged as high - ), and
RSI is at least 115, and price movement on the week exceeds the comparative market index (+ sign beside the RSI), and
finally, limit the selection to stocks trading above $2 at the time of entry.
The Stock Trends Weekly Reporter - TSX Crossovers & Crossover Predictions report lists all stocks with moving average crossovers on the week and can be used to quickly spot stocks that meet the trading criteria. The Stock Trends Weekly Reporter - Stock Trends TSX Portfolio #1 report shows current week trading activity and holdings in the portfolio. This system was designed to identify stocks that are showing signs of breaking out into a new bullish long-term trend. Heavy volume on the crossover week, while perhaps coincidental in its correlation, confirms the strength of the current price movement. Limiting yourself to stocks trading over 100,000 shares a week helps to ensure liquidity: you should be able to sell when you need to.
The money management rules for the Stock Trends TSX Portfolio #1 are as follows: Exposure on each position is limited to $10,000. Although there are no limits as to the number of positions the model portfolio holds, investors will be constrained by their own capital resources. This is a trader's system: it operates on an assumption of action. If a signal is given to buy, the stock is bought. If the sell criteria are met, it is sold. There are no constraints on available capital, and no rules about minimum levels of equity holding. Although the average number of positions held over the period it has been in use is only 4, it did require holdings of as many as 15 stocks at one time. Conversely, the system will often not hold anything in bearish markets.
Clearly, it is a system more suited to a trader with capital resources of at least $50,000, although a lower capital base is manageable. Note that transaction costs are factored into the cost of purchases and the net proceeds of sales at 1% in and 1% out, or 2% commission on a round trip. These commission costs are probably higher than could actually be obtained with today's discount broker rates; however, the excess provides a buffer for the inevitable additional slippage costs.
SELL criteria are as follows:
[Note: Sell Trigger #1, a Bearish Crossover, is not employed in this system].
Sell Trigger #2: A Stop Loss provision is defined for each position held, setting the stop price at 8% below the highest closing price (minimum $0.50 below). If a stock is trading at or below the stop price at the end of a trading week, it is sold at the weekly closing price. Stop prices are moved up with any weekly increase in the stock's price, but, once increased, are never moved back down. For example, if a stock held by the portfolio closes the week up to $10.50, the stop-loss is moved up to $9.66; if on the following Friday it closes down to $10.25, the stop-loss remains at $9.66. Although the use of weekly closing prices instead of intra-week daily lows for this stop-loss provision exposes each position to a higher degree of risk - it is intended to protect capital from losses above a defined limit.
Sell Trigger #3: When the Stock Trends indicator turns from a Bullish to Weak Bullish .
Sell Trigger #4: When the stock's RSI drops below 95.
Sell Trigger #5: When the stock's weekly RSI is negative (-) for three consecutive weeks.
All of these sell triggers demand that holdings in the portfolio maintain a positive trend. Most positions (62%) are closed out by the stop loss provision. Trigger #5 accounts for 28% of the closed positions, with Trigger #3 accounting for only 4%, and 3% from Trigger #4. Stock picking based on this system, investors should remember, is entirely technical and mechanical. It is not based on any knowledge of the companies or evaluation of "investment worthiness". These trades would be entered on a speculative strategy that would be very much similar to any gambling strategy. Here the success of the trading system depends on the dependability of the data and the probability of long-term returns playing favorably in the investor's hand. At the very least, the Stock Trends TSX Portfolio #1 is evidence of the success or failure of this kind of statistical approach to the market. Investors should be encouraged to research their own systems - some of which might prove even more profitable than the one described here.
As the Stock Trends TSX Portfolio #1 Trading History report shows, this strategy has been active and successful. Over the 1,207 weeks from Nov. 11, 1993, to Dec 31, 2017, 576 positions were taken. The report reveals that 229 positions were winners and 347 were losers. The average number of positions held at any one time is 4, with each position held for an average of 7 weeks. The average investment at any one time was $33,748 ( this summary information is incorporated into the Stock Trends Portfolio report published in Stock Trends Weekly Reporter). The total gain for the portfolio at December 31, 2017 was $247,597, for an average gain per winning position of $2,628 and an average loss per losing position of $1,021. The average return per position - winners and losers - is 4.3%. That translates into a 30% annualized return on average investment for the 24-year period. Despite recent bad performances for this strategy, these long-term results compare quite favourably to the 6% annual return of the S&P/TSX Composite Index over the same period.
The success of this trading system - and every trading system - really comes down to two things: maximizing profits and limiting losses. A trader cannot be right about every trade. Expecting a winning percentage in the upper quartile is simply unrealistic. Indeed many successful traders are, in fact, wrong more than they are right. A trade winning percentage below 50% does not mean the trading system is a failure. Stock Trends TSX Portfolio #1 has a winning percentage (the number of trades that provided positive returns as a percentage of the total number of trades) of 40%. What makes the system successful is the ratio of the average gains on positive return trades to the average losses on negative return trades. One way to represent this relationship and measure the profitability of a trading system is the Profit Factor:
Profit Factor = (% of winning trades X average $ gains on winning trades) / ABSOLUTE VALUE[(% of losing trades X average $ losses on losing trades)]
In the case of Stock Trades TSX Portfolio #1:
Profit Factor = (.40 X $2628) / ABS[(.60 X $-1021)] = $1051/ $613 = 1.7
That score is an acceptable rating, although profit factors above 2.0 would be a goal for many traders. Remember that the transaction costs on this trading system average to $4,888 per annum, so traders will want to see a good profit factor to show that the costs and risks associated with a trading strategy are worthwhile.
Another aspect of trading results investors should monitor is the distribution of returns on individual trades in a system. Averages are one thing, but it is important to understand how the returns have varied and what the breakdown of trades looks like. Stock Trends TSX Portfolio #1 trading history reveals that the highest return on a single trade was 408%, while the biggest loss recorded was 35%. The graph below shows the distribution of returns for all 576 positions (as at December 31, 2017).
Stock Trends TSX Portfolio #1 Distribution of Returns