Trade More Stocks By Doing This…

Analysing the stock market
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How much trading capital do you have?

The answer to this question varies greatly. You may be starting out with $20,000, or you could have over a million dollars. Everyone’s situation is different.

I often hear from people with modest trading accounts. One of their biggest fears is missing out on the best opportunities. They worry that they’ll only buy the stocks that go nowhere.

I can understand this concern. Quant Trader’s portfolio typically has around 100 stocks. You simply can’t follow them all with a $20,000 account. This means missing a lot of signals.

But this isn’t necessarily a problem.

In a minute, I’m going to show you how a small portfolio can perform. You’ll also see what happens when you free up capital by selling underperforming stocks faster.

The results may surprise you.

First, let’s review where we left off last time.

A quick recap

Last week I wrote about time exits. The inspiration for the report was a member’s email. Here’s an excerpt of what he said:

I had been wondering about the apparent lack of signal 1s. Can I suggest using some sort of time limit — for example, 3 months? If a signal 1 has failed to perform, then Quant Trader sells the stock to make way for an overflow signal.

Member, David

You’ll remember I put David’s suggestion to the test. I did this by comparing two versions of Quant Trader — one with the standard exit, the other with an early exit for slow starters.

Here’s what happened…



[Click to enlarge]

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

The blue line represents the standard Quant Trader exit. This is where a stock stays in the portfolio until it hits the exit stop. The red line shows the results of exiting slow movers early.

I set the time limit at 60 trading days (or about three months). Any stock not in profit after that time exits the portfolio.

The result was a narrow victory for the regular exit method.

Time exits also had two notable consequences — a lot more trades, and a lower ratio of winners.

Here’s the summary table you saw last week…

Quant Trader
Standard exit
Quant Trader
Early exit
Number of trades 748 1,392
Success rate 62.4% 43.5%

 

The upshot of all this was clear-cut. Time exits didn’t produce an overall benefit. You can review the details here.

Now, these results were for a portfolio of approximately 100 stocks. It didn’t really matter if a few stocks were slow off the mark. They only had a small overall impact.

But what if you’re trading a smaller portfolio? Well, that’s what I’m going to show you now.

The 25 stock portfolio

Many people don’t have the resources to buy 100 stocks. And that’s OK. You can make similar percentage returns by following a smaller selection of stocks.

I generally suggest 20 to 25 companies as a good starting point. This does two important things:

  1. It allows you to spread risk across a range of stocks
  2. You also increase the odds of getting on some strong trends

 

An advantage of a larger portfolio is that each stock has a small weighting. You won’t really notice if a few stocks trade sideways. They only make up a small part of the portfolio.

But this changes as your portfolio gets smaller — each stock has a greater impact. This is when a strategy to exit slow starters can make a difference.

During the week I did some back-testing. The aim was to compare Quant Trader’s exit strategy with one that exits slow starters after 60 days — just like the test you saw earlier.

There was one key difference. I capped the portfolio at 25 stocks. This means the system filters signals once the portfolio is full. It simulates the sort of portfolio you may have yourself.

Let me show you what happens…



[Click to enlarge]

As before, you’re looking at the hypothetical profits from the two strategies. It assumes placing $1,000 on each long signal. And it doesn’t take into account costs or dividends.

The red line shows the results of exiting underperformers early. Unlike the previous test, exiting these stocks is more profitable. The margin is small. But it shows time exits can have merit.

So what about the side effects?

Let’s have a look…

Quant Trader
Standard exit
Quant Trader
Early exit
Number of trades 218 387
Success rate 55.0% 46.5%

 

Just like before. The early exit strategy results in more trades and a lower win rate.

Now, this isn’t necessarily a problem. You may be comfortable with the trade-off for greater profits.

But let me say this. Lower strike rate systems are emotionally harder to trade. You have to be able to shrug off a loss and move to the next trade. Many people find this difficult.

You see, humans like positive feedback. This can make it challenging to trade a lower strike rate system. It goes against our mental wiring.

A highly profitable system is useless if it’s too stressful to trade. This is why I’ve made tradability a priority. I want trading to be as easy as possible for you.

There’s also the matter of brokerage. The early exit strategy is more expensive to operate. You need to weigh the extra cost against the possible gains.

Brokerage is more of an issue for smaller accounts. If you trade in $1,000 lots, then a $20 commission is 2% of the trade’s value. But this falls to 0.2% if your trade size is $10,000.

So which is the better strategy?

Well, they are both valid. It all comes down to your situation and preference.

Early exits can be more profitable. But they require extra work, and can be harder emotionally. It also helps to trade in larger lots to reduce the impact of brokerage.

The standard exit will be slower to exit stocks that drift sideways — this can be a performance drag at times. But the strategy is cheaper and easier to maintain.

I’ve put tradability first when designing Quant Trader. There are no time limits. A position remains open while it’s above the stop-loss.

That’s not to say you can’t use time exits. I know some members like to sell slow starters to free up capital for new trades. And that’s fine — the choice is yours.

Just keep one thing in mind. Good system trading demands consistency. So find what works for you and stick to it!

Until next week,

Jason

Editor’s note: Exit strategy is one of the most important decisions you’ll make. Yet, despite its importance, selling is an afterthought for many traders. This can be a costly mistake.

Quant Trader uses a stock’s recent volatility to determine when to sell. This tailors the exit level to each situation. It’s not just about holding on to winners longer. It’s also about getting you out when the trend turns lower.

So if you’re not sure when to sell…I strongly suggest you look into Quant Trader now.

Try it. See if it makes sense to you. It could change the way you trade forever.

Editor’s note: Quant Trader sources all images in the article above.

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.
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