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Stock Market Trading Rotation System

Anything related to investing, including crypto

karakoram

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Have you tested added a hedge to your portfolio? You could use a 3x bear fund as a downside hedge. It should push your Sharpe way up.

how do you like TradingBlox? I tried it many years ago. I was promised a lifetime license, but it was back when Curtis Faith was in charge, so my license is invalidated.
 
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ljean

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Have you tested added a hedge to your portfolio? You could use a 3x bear fund as a downside hedge. It should push your Sharpe way up.

how do you like TradingBlox? I tried it many years ago. I was promised a lifetime license, but it was back when Curtis Faith was in charge, so my license is invalidated.
I have had Blox for about 10 years. I like it but it's pretty much all I know. It was cutting edge at the time, but there may be better solutions now?

I'll play around with the hedge stuff next week. In Aruba til xmas.
 

karakoram

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I have had Blox for about 10 years. I like it but it's pretty much all I know. It was cutting edge at the time, but there may be better solutions now?

I'll play around with the hedge stuff next week. In Aruba til xmas.
for EOD data, I think you should stick with what works and will allow you to test portfolio trading. For shorter time frames, I don't think TB will work. If you want cutting edge, AI may be the next big thing in trading but I'm not sure yet about that. Also, I just saw in the news today that the EU wants all auto-trading algos registered and they want to test them, at least at the bigger institutions and possibly the hedge funds. They want to regulate all the computer made decisions. If that idea spreads to the USA, I'm not sure how this is going to play out yet.
 

Milkanic

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I've been researching Dual Momentum to use a similar system on index funds (rotates US, International, and Bonds). Averages around 1.6 trades a year (rebalance monthly), greatly reduces drawdowns, and has escaped the bear markets in back testing. CAGR of 21.4% since 1971 with minimal drawdows.

Momentum trading seems almost too good to be true but this has been back tested to the early 1800s and holds up. Its based on human psychology more than market efficiency.

From my research, doing this on individual stocks in a taxable account is tough due to taxes and fees. Have you figured out how taxes and fees eat into your model?

GEM Track Record - Optimal Momentum
https://robotwealth.com/dual-momentum-review/
Why Does Dual Momentum Outperform? | Seeking Alpha

saupload_GEM.png
 
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karakoram

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Momentum trading seems almost too good to be true but this has been back tested to the early 1800s and holds up. Its based on human psychology more than market efficiency.
View attachment 17327

I realize your post was not directed at me specifically, but I can speak to this. Momentum is not too good to be true and there is a cost, both psychologically and financially that you may not be aware of. But even with this cost, it is the most profitable way to invest/trade.

Momentum is just another name for Trend-Following aka "outliers" or the opposite of mean reversion - large deviation from the mean. Historically, trend-following has always worked, and I would be willing to bet, always will work, with the caveat that the appearance of large trends comes and goes. They usually appear when the largest number of people are not expecting them. People declare that "trend following is dead" or "momentum is dead" and then boom, we have the stock market 1995 to early 2000 or 2003-2008 or even better, 2009 to 2018.

If you do a lot of back testing of various strategies you will discover that pretty much every strategy is just a variation on one of two strategies: 1) Mean reversion or 2) Trend following. You will also discover that one is pretty much the inverse of the other.

I just closed out a trade yesterday in the cryptos on the idea of "the Trend is my Friend except at the end, when it bends" and it worked out very nicely for me.

Mean-Reversion aka Counter-Trend aka "short volatility" aka "risk-on" has the following characteristics
  • Relatively easy to use psychologically because of
  • high numbers of winning trades. Most of your time is spent winning.
  • winning trades are small in profitability
  • large losing trades that wipes out all the small profits + a bunch more
Famous examples: the Long Term Capital Management blowup, 1998. Not only was their strategy mean-reversion, they LEVERAGED it up to boost returns when they were winning. Well, that also boosted their loss to a huge degree, as we know now.

A far more ubiquitous example is the sub-prime lending debacle. The banks and lenders were "investing" in all of these sub-prime loans. Banks and Lenders were short volatility. They were happy to "sell insurance" or Credit Default Swaps to the guys like Paulson, Burry et. al. who wanted to be on the other side of their bet. Note that Paulson, Burry, et. al. were paying millions to the banks for these CDS (small losses) Well, we all know how that turned out. They made BILLIONS.

Another example of Short Volatility is selling insurance as an insurance company. Most of the time they get away with it because they spread their risk over many people. But what happens when all of their customers make claims simultaneously? This is why they don't want to insure against earthquake or flood.

Another example is "writing" options or selling options. Its no coincidence that this is analogous to "writing" insurance policies.

Trend-following aka "Risk-off" aka "long volatility" aka momentum has the following characteristics
  • Hard to use psychologically because of
  • high numbers of losing trades and
  • losing trades are usually small in losses. Most of your time is spent losing!
  • a few, infrequent large winning trades i.e. more money is made in the few winners than is lost in all the small losing trades
  • It is NEVER known when the next large move (winning trade) will appear, so if following a mechanical system with fixed buy/sell rules, every signal MUST be taken or that one winner that could make you profitable could be missed.
Going back to "The Big Short" example: While their trade direction was short, they were long volatility, i.e. they were betting against the banks.

(Don't confuse trade direction with strategy type, ie, I can be "long volatility" but trade the short side of a market - in other words, I am trend following the down-trend - example: I shorted the stock market in 2008 by following the down trend and made out quite nicely - I was long volatility but short in my trade direction)

Buying options or long options is another example.

Going back to the insurance example: When you buy insurance, you pay a relatively (compared to the potential payout) small premium every month (small losses) and you get a big payout if the unlikely event occurs. Of course, making insurance claims is not a recommended vehicle for creating wealth so this is just an analogy.

Now if you want to get REALLY interesting, it may be possible to hedge either of the above, ie Market Neutral. I've found that the key is that you must get your hedge very cheap and when it kicks in, it must be able to counteract most or all of the loss incurred by the primary strategy. I'm not yet clear on the details, as I am still investigating this idea. A simple example is to buy an index fund, and hedge it with a 3x leveraged bear fund. It does not work to be a "straddle bug" where you buy a particular instrument and simultaneously short it, like with another broker. Your gains/losses would be cancelled out 1:1 minus your transaction costs, so you are net loser.

More complicated examples are combined options strategies, where you combine buying and selling options in the same trade.

Famous money manager trader that uses a market neutral strategy that works: Edward O Thorp. He's one of my heros.
 
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ljean

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I havent posted here in a while, havent had much to report. Its pretty much been one step forward, one step back over the past few months. I did close out this position this morning for a quick 30% profit.

dds.jpg
 

ljean

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Portfolio wise, still nothing much to report. I popped this one off today for a 30% profit. I'm sitting on a few more retail stocks that have done very well but I think they still have a bit left in them. Sold a bunch of oil drillers this morning that weren't going anywhere.rcky.jpg
 
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ljean

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I closed this one out today at 115% profit.

aoi.png
 

ljean

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This is my big winner this week, closed with a 35% profit.

thc.png
 

ljean

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Closed out two more good ones today.

egy.png


smrt.png
 
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karakoram

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pretty cool stuff. Would you share your statistics on number of losers, number of winners, ave % gain on winners, Ave % loss on losers, etc., like on this page: StockSpotter.com - Performance
And let us know your beginning date for using this strategy?
 

ljean

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44% win ratio
2% equity per position (50 stocks max)
-14% avg trade loss
+34% avg trade win
200 trades/yr
3 mo. avg trade duration
 

ljean

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Yes, its a value strategy with a trend-following overlay.
 

ljean

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Here is my big winner closed out this week. I bought this in early February and it more than doubled.

fosl.png
 

ljean

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This may be my biggest one day jump in a stock +155%

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ljean

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Two good positions closed today. CLBS actually exposed a hole in my strategy and should have not been purchased but I wont complain too much in this case.

RH.png

CLBS.png
 

karakoram

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Would you elaborate on the issue with your strategy?
 

Elif

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When you buy 90 stocks you are essentially buying an index fund and the return potential will be muted. Diversification is good but too much diversification means you limit your upside. 10 - 20 would be more reasonable
 

ljean

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I'm down to 50. Its easier to keep track of.
 

ljean

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This is the one that got away. I closed out at a 20% loss in May.

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eliquid

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I like this angle.

There is a similar strategy ( Im referring to your original post ) call the 12% Solution in a book I read from Kindle at https://www.amazon.com/dp/B0759X92Z6/?tag=tff-amazonparser-20.

Although it is not the exact same, the idea is the same ( rotation ).

I'm going to follow along this thread.

.
 

ljean

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Closed out a couple big winners today. I bought EGY at $1.00 and sold at $1.50. Then bought it back at $2.50. TGA I bought in three chunks near $2.00.

egy.png tga.png
 

MJ DeMarco

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And here is my 6-month performance history.

Returns look to have a strong correlation (positively) to the S&P. Are you doing anything that would benefit from a bear market or are you long everything?

Great job thus far, it's always a nice feather in the cap when you're beating the index.
 

ljean

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Returns look to have a strong correlation (positively) to the S&P. Are you doing anything that would benefit from a bear market or are you long everything?

Great job thus far, it's always a nice feather in the cap when you're beating the index.
I fully expect it to decline in a bear market with everything else. Though I do not anticipate as far as a fall compared to the S&P due to the mechanics of the program. I am also currently researching a T-bond hedge which shows a bit of promise.

But, to answer your question, yes it is long only.
 
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ljean

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Got clobbered in this position today. Luckily, other stocks were up enough to still give me a decent gain on the day.

gts.png
 

MJ DeMarco

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Can I ask when (price) your entry was? (GTS)

Got clobbered in this position today.

Thank you for the transparency, we usually don't get that a lot when people are posting stock market stuff here-- they only post gains and then disappear when things go the other way. Appreciate the info.
 

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