Turn Average Share Trading into the Extraordinary

Stock Market Analyze
Reddit

Some people say spontaneity is the spice of life.

Part of me envies this mindset. The idea of living for the moment has always been enticing. I often marvel at people with a seemingly carefree existence.

I remember watching a group of surfers years ago. It was mid-morning on a Monday. The water was sparkling and the surf was up. It looked idyllic — surely they didn’t have a care in the world.

This way of life has a certain appeal. But it’s not for me. I’m just not set up that way.

You see, I’m a planner by nature. I set goals and then figure out how to achieve them. Spontaneous living is a mismatch with who I am.

In my world, planning matters — it’s the swing factor that can turn average into extraordinary.

I’m going to talk about Quant Trader’s performance in a minute. I’ll also mention some of the factors that contribute to good share trading results.

But, first, let me tell you a story. It shows how good planning can make all the difference.

Having it all

Last weekend, I was at the Little Athletics State Multi-Event Championships. It’s a similar format to the decathlon that you might see at an Olympics.

This year’s event was at Dubbo, in central New South Wales. It ran for two days and attracted some of the best junior athletes in the state. Three of my kids were competing.

Success at this type of sport requires a lot of planning. You see, a single special ability won’t get you far. Athletes need to score well in every event to be in contention.

I saw some outstanding runners who couldn’t throw the shot put.

There were also excellent field athletes whose running skills weren’t up to scratch.

Then you had the sprinters who couldn’t hold it together over 800 metres.

Watching the leader board shuffle around after each event was captivating. Slowly but surely, it became clear which athletes had the best overall plan.

Share trading is no different.

A successful share trader needs all-round planning. It’s simply not enough to just have a great entry technique or to specialise in a few stocks. You have to ‘score’ well in a range of areas.

Quant Trader is a complete plan. I designed it to bring together entry, exit, risk management, and portfolio selection.

Another key area it can help with is emotions. I know from experience that a good plan helps you stay the course in challenging times.

It’s interesting to think back on some of my colleagues over the years.

I remember one trader who came and went during my days at Bankers Trust.

He had come over from another leading investment bank with a big reputation. I guess this guy was keen to make a splash…and he did just that.

I recall him losing over $1 million in one of his first days. Back in 1993, this was like a meteor hitting the ocean. It was an extinction event for this particular trader.

Sure, he had steely emotional control. He could also think quickly under pressure. And, from all reports, he had a highly successful entry technique.

But he had a blind spot. His plan didn’t include robust risk control.

It was just like the gun sprinter who couldn’t handle a discus. You can’t win a multi-skilled event without a comprehensive plan. Sooner or later, a weakness will drag you down.

A fine line can separate success and failure. The difference often comes down to how well you plan.

Beating the bear

Big market corrections are tough for many traders. They find it emotionally draining to see the market fall week after week. It’s no wonder this is the point at which many quit trading altogether.

But it doesn’t have to be this way. Having a robust plan can ease the emotional strain. It can also limit your downside while you wait for the next bull market.

Quant Trader has been producing live signals since 17 November 2014. During this period, the All Ordinaries has had nine losing months. It hasn’t been the best of times for the market.

So let’s see how Quant Trader’s plan is holding up…

Quant Trader share trading signals

Source: Quant Trader

This chart shows the hypothetical profit from following every long signal. It assumes placing $1,000 on each signal. And it doesn’t take into account costs or dividends.

The overall trend in profits is up. But it’s not a straight line — it never is. There’s a natural ebb and flow. I don’t know of any trading system that makes money week-in-week-out.

You’ll notice the recent pullback from January’s high point. It coincides with a sharp fall in the market. The pullback is similar in those seen in June and August last year.

I spoke last week about giving stocks room to move. This makes it possible to get big trends. The trade-off is the profits you give back when the trend ends. This is what’s been happening recently.

Now have a look at this next chart. It shows the All Ordinaries over the same period.

QT versus ASX 09Apr16

Source: BigCharts

 

The two graphs have little obvious resemblance. But look closely and you can see a relationship.

Both charts often have up and down days at the same time. But the difference is Quant Trader’s dips are generally shallower…while the rises tend to be stronger.

The reason for this is simple.

Quant Trader’s algorithms only signal stocks that show signs of strength. At the same time, they avoid buying stocks in downtrends.

It’s a case of share trading what’s working…and avoiding what’s not.

This isn’t to say every signal will be a winner. But it means you’re trading with the trend. In my experience, this shifts the odds in your favour.

Let’s look at a few statistics for long trades. I’ll discuss shorts separately another time.

The portfolio has 176 open trades. There are another 219 positions that are closed. To keep the data compact — and give a truer measure of performance — I’m going to merge both groups.

The average profit for all open and closed trades is 7.1%, and the average holding period is 200 days. By comparison, the All Ordinaries is down 4.9% since Quant Trader’s start date.

We can break this down further. The following figures are averages.

The top quarter of trades is ahead by 47.4%. The average holding period is 293 days.

The middle 50% are doing a little better than breakeven after 182 days. This stacks up well next to the All Ordinaries’ 4.9% loss.

And the bottom quarter is down -19.6% over 144 days.

This type of result is typical of a trend-following strategy. The bulk of the profits come from the top quarter of trades. These are the stocks that run a long way — we call them ‘outliers’.

Ideally, your portfolio will have a sample of stocks from across the three categories. This is why it’s important to have a good spread of trades.

Remember, the plan is to have many small trades, not a few big ones. This is how you increase the odds of getting the outliers.

Many share traders fail because they only have a partial plan. This may work some of the time. But the market eventually finds their weakness.

The ‘secret’ to Quant Trader’s results is robust planning. There’s a strategy for entries, exits, running profits, and cutting losses.

In my experience, the best planners make the most money.

Until next week,

Jason McIntosh
Editor, Quant Trader

Editor’s note: Is your portfolio performing like the All Ordinaries? Don’t worry if it is — Quant Trader can help you turn it around. Remember, the results you saw before are from real signals. They could easily be hitting your inbox from Monday.

Take the next step…see what Quant Trader can do for you.

Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.
Reddit

Leave a Reply

Be the First to Comment!

Notify of
avatar
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au