One of the simplest trading strategies market timing investors can employ uses the trading signal defined by a moving average crossover, which is exactly what the Stock Trends indicators are based on. But there are often many stocks with a Bullish Crossover (also known as a 'Golden Cross') in a given week - how do we decide which ones to trade?
Most technical traders use moving averages in conjunction with other technical indicators. Key factors to look for include both price momentum and volume support, both represented by Stock Trends other indicators. An elevated Relative Strength Indicator (RSI) and a high volume indicator provide a rudimentary basis to filter the Bullish Crossovers and isolate potential breakout stocks in a newly bullish trend. This basic Stock Trends methodology has been applied for years on the Toronto Stock Exchange (Stock Trends TSX Portfolio #1), and is applicable across markets.
Using the same trading strategy, the model portfolio results for the New York Stock Exchange deserve some attention. The Stock Trends NYSE Portfolio #1 trading strategy, defined below, has averaged 16% annual returns over the 27 year period November 1990 to December 2017!
The trading results of the Stock Trends NYSE Portfolio #1 compared to the benchmark S&P 500 Index:
ST NYSE Portfolio #1 Strategy Performance - 1991 to 2017:
Nov 11/1990 to Dec 31/2017
* ST portfolio annual returns are based on average invested capital for the year.
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 NYSE Portfolio #1?... simply subscribe to Stock Trends Weekly Reporter for $19.95/mo (or choose one of our money-saving annual subscription plans). Each week we run our proprietary Stock Trends Portfolio Buy filter to find new acquisitions for this and other portfolios, and review the current portfolio holdings for our Sell signals - all published in weekly Portfolio reports made available to subscribers.
STOCK TRENDS NYSE PORTFOLIO #1 TRADING STRATEGY
The trading criteria defined for the Stock Trends NYSE Portfolio #1 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 - NYSE Crossovers 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 NYSE 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 NYSE 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.
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.
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 Thursday 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 (66%) are closed out by the stop loss provision. Trigger #5 accounts for 25% of the closed positions, with Trigger #3 accounting for only 4%, and 4% 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.
As the Stock Trends NYSE Portfolio #1 Trading History report shows, this strategy has been active and relatively successful. Over the 1,411 weeks from Nov. 11, 1990, to December 31, 2017, 726 positions were taken. The report reveals that 287 positions were winners and 439 were losers. The average number of positions held at any one time is 4, with each position held for an average of 8 weeks. The average investment at any one time was $41,437 ( 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 $178,972, for an average gain per winning position of $1,908 and an average loss per losing position of $840. The average return per position - winners and losers - is 2.5%. That translates into a 16% annualized return on average investment for the 27-year period. These results compare to the 8% annualized compound return of the S&P 500 Index (not including dividends) 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 NYSE 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 NYSE Portfolio #1:
Profit Factor = (.40 X $1,908) / ABS[(.60 X $-840)] = $763/ $504 = 1.5
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 $5,370 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 NYSE Portfolio #1 trading history reveals that the highest return on a single trade was 152%, while the biggest loss recorded was 40%. The graph below shows the distribution of returns for all 726 positions (as at December 31, 2017).
Stock Trends NYSE Portfolio #1 Distribution of Returns