REVEALED: trade both long and short and make 22% per year in less than 30 minutes a day
Benalmadena, Spain, October 2015
The Secrets of Successful Stock Trading: Part 3 – Being back in Spain I just realized how blessed I am with the joys that life offers me by being able to travel all over the world and have the liberty and freedom to choose where to live with my family and where to choose my working location.
Below you see a picture of the view that I have from my private office in Benalmadena, right under the sun of Malaga, Spain.
With a view like this I get the inspiration I need to develop the best possible trading strategies to increase my personal wealth and my customers.
As promised in my last post a couple of days ago I will show you here a simple way of how to create a system that makes money in bull markets and protects you and makes money in declining markets.
I have not forgotten the year 2008 and I know my history of stock crashes in 1929 and 1987 so we need to combine systems.
The idea is simple and we do this in the following steps:
- Start with the creation of a long term trend following system, i.e. a system that makes money when the markets are trending up.
- Create a second systems that trades short in order to hedge any kind of market decline
Now, I am going to reveal a very large part of the rules but not all. This would not be cool and fair to my private elite clients who have paid me money for this and are increasing their returns and are very happy this year as the system is up close to 22%.
Long Term trend following on S&P 500 stocks:
– Portfolio: we only trade very liquid S&P 500 stocks
– Entry rules:
- For the last 6 months the rate of change of the price is 20% or more (this makes sure we are in an up trend).
- The stock must not be extremely overbought, otherwise we buy too high. This is measured by an oscillator and there are a variety if simple indicators for that.
- We trade a maximum of 10 stocks, each investing 10% from our equity.
- When we have more candidates than 10, we rank them by a shorter term trend filter, ranking the highest short term up trend
- When all this applies, we buy the next day on open
– Exit rules:
- When the order got executed we place a stop loss 25% below our entry price
- We let this position trail. I.e. when the price goes up, the stop moves up as well
- When the price closes below the trailing stop, we get out, next day on open.
This is 90% of the complete long system! It is of course possible to use a much more advanced algorithm for your money management and add additional exits but I wanted to keep things simple here.
This long term trend-following system gives you the following result:
This is just the first part of the system as we only trade long but see how much better it is already than the benchmark:
Great result to start with! But there are is ONE thing I do not like about it:
The maximum drawdown is 34%, a LOT less than the S&P 500 but still too large for me. I do not want to have a drop of 34% in my equity, nor do I wish you will have that!
So we will create “the hedge” trading short (you win when the market goes down) at the same time.
Short system, shorting US and world ETF (Exchanged traded funds)
– Portfolio: Index ETF’s from the USA, Asia and Europe
– Entry rules:
- The close of the ETF is below the 50 day moving average (i.e. it is trending down)
- The stock must not be extremely oversold, otherwise we sell too low. This is measured by an oscillator and there are a variety if simple indicators for that.
- We trade a maximum of 4 ETF’s
- When we have more than 4 candidates to trade we rank them by the 4 highest volatile ETF’s first
- Short market on open tomorrow
– Exit rules:
- When the trade is executed in the morning we place a stop loss 5% above the entry price
- Besides this there are 2 more exits, one is a percentage profit target and
- The second one if the stock moves above the 50 day moving average we get out again.
That’s it! I left a couple of things out, but 90% of the strategy I am revealing here.
The main objective for this system is to MAKE MONEY WHEN THE LONG TREND FOLLOWING SYSTEM IS LOSING MONEY.
See the equity chart of this system and see when it makes you money??
Can you see how it beautifully made money in 2008? And again in last August! That is what we need a hedge.
Here is a chart where you see both systems.
The blue line is the long system and the red line the short system. This is the perfect combination. When the long system is starting to loose, the short system jumps in, you are protected!
It is crucial to trade these 2 systems simultaneously, if you do so, you get the following combined result:
Results of a combination of long term trend following S&P 500 stocks with shorting world ETF’s
What do you have now?
– 22% annual results versus 5% of the S&P 500
– 2008: +7.75% versus -38.28% of the S&P 500
– Maximum drawdown of 15% versus 56% of the S&P 500
– Longest drawdown 11 months versus more than 5 years of the S&P 500.
– And all this with a lower volatility than the benchmark
– and this year the system is up 21%!
So, this was a simple example of a combination of 2 systems. We can enhance this a lot and improve the performance, lower the drawdowns and make it suitable to YOUR situation and objectives.
- If you want a system with extreme low volatility, I help you with that
- If you look for a system for your 401 K or IRA account I help you with that
- If you look for a system that will risk more and create 50% per year return (and no 500% per year return I do not offer, it does not exist, what I teach is achievable and realistic) , I help you with that
Ways to improve the performance are:
Now we have 2 systems, long and short, but both trend following in their setup.
- We can ADD MORE NON CORRELATING SYSTEMS to it and make a combination of:
- Long – trend following
- Short – trend following
- Long – mean reversion
- Short mean reversion
Mean reversion is a strategy that is perfect combinable with trend following and it buys oversold stocks and closes them when they revert back to the mean. For shorts vice versa.
Combining mean reversion with trend following is the perfect way to achieve an even higher return with lower risk. I will write about that in a next blog post.
- Have a lot more advanced money management and position sizing, individually, based per system to achieve the objective YOU want.
In this post I had a couple of objectives for you:
– I wanted to reveal as much as possible showing a SIMPLE system that makes great money in bull markets and bear markets.
– Help you understand that this is a concept everybody can trade.
– Show an approach that you can execute in less than 30 minutes a day.
– Helping you to understand that we can work together and help you create a system according to what YOU want.
– Helping you to understand that the Holy grail of stock trading is combining different systems that are designed for different market types (bull, bear, etc.)
In my Elite mentoring program where I work one on one with my students, we go a lot deeper;
– We start with analyzing your personality and what kind of system fits to you
– We develop together the systems based on YOUR objectives and comfort zone
– We develop a customized money management strategy that takes your risk tolerance and your profit objective into account
When finished you have a custom solution that will set you for life, executable in less than half an hour a day so you can enjoy your life, enjoy your freedom and at the same time, your money is working for you!
As you know I only work with a few students at any given time because of my other activities and because of the intensity of our work together.
My Elite mentoring program is not for everybody, and it is by application only. I need to see if you are a good fit.
Click on the link below, leave your name and email and you will get all the details
Trading Mastery School