Trading style. It’s at the core of every trader.
And it’s a personal thing.
There’s no single best style. A perfect fit for one person may be unworkable for another. It’s something you develop over time.
Quant Trader has its own style. I’ll talk about this in a moment. I’m also going to share some comments sent to me last week. The message relates to Quant Trader’s initial stop-losses.
But first, let’s talk a little about trading style.
Your style is a mix of factors. It includes things like personality, tolerance for risk, and how much time you have for trading.
Take a spot foreign exchange (forex) trader for instance. This is a highly intensive way to trade. It’s also a full time job. You can’t trade like this on the side.
Spot forex dealers fit a particular mould. They are typically assertive men in their 20s or 30s.
These guys have nerves of steel. This is a high-stakes game. And it happens at a rapid pace.
Don’t worry if this doesn’t sound like you.
A spot forex dealer has a particular trading style. It’s well suited to what he does. But it’s by no means the only way to make money.
I’m more interested in a trading style anyone can use. Something more practical.
I know most people can’t sit around a trading screen all day. They also aren’t comfortable with massive amounts of risk. And that’s fine.
There’s a particular trading style that I think just about anyone can use. I call this style strategic trading.
It’s a medium term approach, so portfolio maintenance is relatively low. The style combines a trend following strategy with risk management.
Does this sound familiar?
That’s right. I’m talking about Quant Trader.
I’m sure you already know I’m the designer of Quant Trader. What I’ve done is take my trading experience and convert it into algorithms.
Quant Trader is essentially an extension of my own trading style.
The underlying strategy behind Quant Trader is medium term trend following. The aim is to maximise profits by letting winning trades run.
Locking in an early gain can be tempting. The problem with this is that it caps your upside. The key to capturing big moves is to ride the trend.
That’s how you get the ‘outliers’…stocks that rise +100%.
The other side to this is managing risk. Every good trading style has a strategy for this.
Profits can help make you. But out of control losses will break you.
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Quant Trader’s risk management strategy is to cut losses relatively early. You’ll notice I underline the word ‘relatively’. This is a key term. And it’s important this is clear.
Have a look at this. These are comments from a former member about Quant Trader.
‘While I liked the idea that you proposed, I am uncomfortable with a number of aspects…
‘Your “stop loss” conditions surprised me. I had imagined that they would be quite close and not in the 25–30% loss range…I thought the plan was “exit quickly”…’
On one hand, he likes the idea of riding big trends. But on the other, he’s uncomfortable with losses. His trading style needs some work. I don’t think he’s fully across it yet.
Let’s look at some numbers.
Quant Trader has been up and running for over 18 months. The average gain for buy signals (open and closed) is currently 28.1%. The average loss is just 12.3%.
By comparison, the All Ordinaries is up 0.3% for the same period.
Quant Trader is aiming to ride BIG trends. Back-testing and live signals support this. There are numerous stocks up by well over 100%.
This is where ‘relative’ comes into play. If you’re shooting for a 5% profit…then 25% is a crazy exit stop. You’ll almost certainly fail in time.
But Quant Trader isn’t aiming for a small gain. The strategy is about getting trades with double or triple digit returns. In this instance, an exit stop of 25% is relatively small.
And remember, 25% is a hypothetical maximum loss. Not every unsuccessful trade loses this much. The average loss is currently 12.3%.
I think it’s fair to say that a 12.3% loss is relatively small in comparison to a 28.1% gain.
Keeping the numbers in context is important. One figure in isolation doesn’t tell the full story. You need to look at the whole package.
Another factor to consider is the success rate. Quant Trader’s strike rate is currently 54.5%. This means over half the signals are in profit (open and closed combined).
The success rate is important. It tells you a lot about a system’s tradability.
Suppose Quant Trader had a maximum exit stop of 10%. What do you think would happen?
Well, first of all, the average loss would be lower. This would possibly please someone who thinks the current settings are too generous or risk tolerant.
But we also need to consider the impact on the success rate.
Tightening the exit stop increases the odds of an early exit. This means the success rate will fall.
Let me show you.
Have a look at this trade for Resmed [AU:RMD]. It’s an example from back-testing.
[click to open in new window]
This is how the trade looks with Quant Trader’s current settings. The end result is a gain of 51%.
That’s a respectable trade…no doubt about it.
Now have a look at RMD with a 10% exit stop.
[click to open in new window]
The 51% gain is gone. In its place is a 10% loss. The trade never leaves the runway.
Of course it’s possible to re-enter RMD. But the overall success rate will fall regardless.
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 on 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.
Lastly, every trader has to be realistic. Hoping for big medium term gains, using short term stops, is all wrong. It’s a mismatch of styles.
So give some thought to your own trading style. Make sure it’s a good fit with your goals and personality. Getting this right early is one of the most important things you can do.
Until next week,
Editor, Quant Trader
Editor’s note: Each day the markets are open, Quant Trader scans practically every ASX stock for opportunities. There’s a good chance you haven’t heard of some of these ‘hidden’ stocks. And that’s understandable — the ASX has over 2000 listings.
Quant Trader’s latest success is a financial services company. You’ve probably never heard of it — HUB24 Limited [ASX:HUB]. Just last week, Quant Trader subscribers booked a 147% profit.
Anyone can get gains like these. It’s all about having the right strategies. You can learn more about these here.
PS: Quant Trader sources all images in the article above.