Thank you Eganon for the thoughtful reply. To clarify a few things: 1) My goal is to completely remove discretion. The entires/exits shown above are from an indicator I built. My idea was that buy and hold would be preferable, but I'd like to take some of the risk of major drawdowns off the table, and cut out the "in-between" time of the roller coaster. 2) The exits are not a percentage of the original position. They are a flat $15,000 chunk. The exit triggers typically correlate with overbought conditions and a break in an uptrend. Again, all done via indicators, not TA on my part. So, walking through a typical trade, I enter with a $60,000 position when my indicator signals the start of a new uptrend. The stock typically moves up to overbought territory, when the short term uptrend is broken, a sell signal occurs. So I take $15,000 off the table, but the unrealized gains made on the trade and the other $45,000 are still in the position, riding out the move. This process is repeated for each red (sell signal). The more sell signals that are triggered, the more extended the stock is (typically). Which means I'm taking more of the basis off the table in case of a trend change. Look at Apple from 2006 through 2007. During that run up, there were 7 profit taking signals. Each of these signals would have taken $15,000 out of the position, but the unrealized gains would still be riding the wave until enough $15,000 sell signals occured. But, instead of facing the huge downturn with my full $60,000 position, plus the unrealized gains it had made during the run up, my position at the 2008 drop would have been substantially smaller. Leaving me with a far smaller drawdown than if I'd just bought and held. The reason for the profit taking is to lock in some gains in case of a drop. But remember, the unrealized gains from the up move are still left in play. I'm not trying to set records here, I just want 15% a year without any huge loses. The point of the entries and exits are just to make buying and holding more efficient. These are companies I want to own for the mid-long term. But I don't want to wait two years for a 30% move (the result of ups and downs) when I can capture 15% moves every few months, then re-deploy that capital in another stock when a buy trigger is signaled. 3) I have no stops. In all former technical strategies I used a hard stop. However, these are companies I want to own long term. They're fundamentally fantastic, so I'm willing to wait for them to turn around if they dive a bit. But with my scaling out, the drawdowns are typically far smaller. 4) You mentioned "ideal exits to max profit and exit entirely". I can't play that game. This has to be a zero discretion system. I can't pick and choose which exits I think are better than others. It has to be all or nothing. Hopefully that clears it up a little. Thanks again for your insight, I appreciate you taking the time.
What works in sim will work in live. The only variable is you, the trader. The biggest problem I see is when you go into your $60K position, what happens when it moves $15K against you? Or $30K? or $60K? You seem to predicate your "system" upon the idea that whenever you enter the market, you WILL GAIN $15K, before you will see -$30K unrealized. Do you have heart meds handy?
The profit taking signals occur when a stock is both overbought and breaking a shorter term uptrend. So the odds of getting a profit-taking signal during a drawdown is very, very small. However, these are fundamentally fantastic companies. Companies that I want to own for the mid to long term. So I have no problem with holding during a dip and waiting for the trend to come back my way. You'll see these occurrences (buying before a dip) when two consecutive green entry signals are shown. The whole goal of the system is just to make "buy and hold" more efficient. To cut out the in-between time of normal long term price action.
If you've truly found an edge and understand how to appropriately use your indicators, adding in a fundamental factor can be helpful as a secondary bonus to your indicators, but you're also potentially losing the stability of the fundamental factor if you're going to be getting stopped out of some of the positions(yet your overall intention is to hold longer), as it could potentially move up without you. If you're saying you're going to hold the $15,000 or $30,000 part of the position no matter what (even if stopped out of the other part) due to you liking the fundamentals, than you're going to potentially erode the edge you have via your indicators(assuming they work, the edge is there and you understand them). Seems like a tricky balancing act to me and you need good execution as you have a lot of moving parts. Also seems you're only looking to trade one way, so a lot of your success and likely confidence is going to be relying on not getting in right as we have a pullback or correction. Where as if you are able to parse the market effectively into Bullish, Bearish or Neutral and trade both long and short, this wouldn't be as much of an issue.
As mentioned above you still have not addressed when you are wrong and why $60K is not a good amount to say you will trade per trade. Volatile stocks and volatile markets like 2008 will lead to steep loses. You need to be thinking in terms of what happens when I am wrong,...EVEN if you want to hold these stocks for a long time. Stops help with that. You could be caught in a bucking bronco situation like the bank stocks in 2008. A simple trend line break of 45 degree angle will solve that. Also your charts appear to be a log scale and tend to skew the growth as price goes higher, like in AAPL from $7 to $24 and then $24 to $124. Think about what profit would be if you biught $60k at $7 for AAAPL where your green line is then exit ENTIRE position at 2008 when the 45 degree angle is broken. See chart below. You would have sold everything around $19. Thats a MUCH bigger gain than what you are doing where you take out $15K each time (I said 25% thinking you meant to take off 25% of your position but I see you are taking off 25% of your ENTRY and leaving profits to run) As far as selling at over bought conditions I agree entirely. But use those situations to sell everything and then buy back when price retraces to the trendline,.....close to your stop (trend line break). I know you said you dont use stops but I think thats playing with fire unless you have mental stops and watch markets closely or you use options to limit downside risk. You are too focused on profit and not enough (it appears) on limiting losses. Also, use trendlines more to your advantage and simple 45 degree trend line channel would eliminate big drops. Lastly, I again have a hard time believing your system would have had you buy into AAPL at $0.82 in 2002 and 2003. IF so,...well great,...but again would you REALLY put $60k into a penny stock that is thinly traded under $1 at that time??? AAPL may have had a solid number of shares traded at that time but most sub $1 stocks do not. Penny stocks are extremely volatile and run too much risk. You need to protect the down side and the winners will come. Your lack of appreciating that means you will see large drawdowns and scaling out limits your upside (Especially with no stops you have max loss at risk on entry and in effect not cut losers AND have not let winners ride either because you scale out when the trade is going your direction). This is the opposite of what you should do. I also used the log scale below in the chart. Eganon
Thanks again guys for your input @eganon69: I will not use trendlines as I said before this needs to be 100% objective. Zero decisions made by me. It doesn't matter how many rules you create, trendlines will vary and will be nearly impossible to accurately backtest and will be subject to emotion when trading live. Technical analysis of any kind will not be involved in this system. I've used trendlines a lot over the past few years and I'm working to get away from that style of trading/investing. I don't need to be perfect, I just want to capture moves in a shorter time frame than waiting out the buy/hold strategy. You're correct in stating that I wouldn't have purchased AAPL when it was insanely cheap. One of the rules is no stocks under $4. However, I added that section of the chart because I figured you guys would want to see samples of what happens during big dips (2008). Can you further explain why you don't like $60K for position sizes? At $60K, that's about 15 active positions, not too many to handle at once, be enough to be diversified between sectors, each position being about 7% of account. Additionally, the $15K sell signals fit nicely into $60K for new positions or adding $15K chunks to existing positions. What type of stop would you suggest (again, no technical signals please)?
I'm not saying I'll hold no matter what. I'm saying that each red line is a sell signal, that correlates with overbought and a break in uptrend. Each of those signals shows weakness. So I react by taking some profits and reducing my exposure. But if the stock continues higher, I still have money in the position, until enough sell signals (overbought conditions) present themselves and I've sold off enough $15K chunks to have nothing investing in that stock left. The goal isn't to call tops and bottoms, or get all of an up move. The goal is to capture the middle chunk of an upmove and to decrease my position to avoid the huge losses. My annual profit target is just 15%. Capturing 60% of an upmove and avoiding most of the large drawdowns should net me at least 15% per yr. Like I mentioned before, I want to buy and hold, but avoid the 2001, 2008 losses. Ideally, I would just continue adding at green entry signals and avoid selling altogether. But I'm recently retired ($900K is just the actively managed part of my portfolio), and I have no additional money coming in to periodically add.
My main concerns were only trading in one direction (even though equity markets are naturally bullish bias) and the mixing of fundamental and technical. But if you're going to honor your stop losses per plan, than the mixing makes more sense.
It would be interesting to see what would happen if I flipped the system and used terrible companies during downtrends.
Well, I am finding it harder to help you when you say NO TA, yet you state you have developed an "Indicator" to trade off. A trendline is an indicator to me. Hell, use a weekly EMA 52 or something. When EMA 52 < PRIOR week EMA 52 you sell.....that is an OBJECTIVE measure You are planning on holding for long term so the lag of something like that is not going to bother you but will be better than buy and hold and get you out of major downturns. Take profits as you are doing with overbought situations but add to position when it retraces to the EMA 52 or whatever. I am NOT a fan of EMA type crosses in trading because they lag the market and will lead to whipsaws but I do use them as confirmation on occasion because they are truly objective. You have conveniently provided trades that were beginning in major trends. Find trades where your entry failed and find trades in choppy markets. Hindsight is 20/20. You have to decide your stop. I have my methods but they involve TA. I am a pure TA trader. An appropriate stop is where you KNOW your trade is wrong. None of your charts shows a trade that went wrong. I am sure you have some. What was the "indicator" sell signal doing/saying when your system tells you to take profits? Does that same indicator tell you to sell on trades that turn out wrong and never actually make a profit? The point at which the "indicator" says get out may be best stop. But since I dont know your indicator I can only suggest that. Since you created it you should be able to calculate what OBJECTIVE price that would be where you are wrong. THAT is the stop. THEN, take for example 0.75% * $900K to get RISK PER TRADE = $6750. Take that number and divide difference of entry price and stop price by that number. For example, if BUY is at $20 and stop is at $19 then (20-19 = $1/share risked) you can buy 6750 shares ($6750 risk divided by $1/share risked = number of shares). That is 6750 * $20 = $135K. If your stop is $16 you can buy $6750/$4 = 1687 shares. That is 1687 * $20 = $33,740,....BUT RISK IS STILL $6750. This keeps risk equal across trades. In a volatile stock like IPG that fluctuates 10% or more per week or 2 will quickly ruin you when you lose $15K or more on a single trade. (ESPECIALLY with no stop). Have a few of those and you will lose. So this method ensures lower shares bought for more volatile stocks. Again, I am trying to get you to think in terms of RISK to capital. Do you really need to be diversified in 15 sectors? If your system determines strong stocks shouldnt it also be able to delineate strong sectors or ETFs representing various sectors. Do you really want to be in suboptimal sectors just for diversity or would you rather be in the strongest 6-10 sectors as per your system? Diversifying is a way to limit risk (good) but too much diversification makes your account essentially an index fund (bad). You have to balance the 2. I have no problem with taking profits. Its ok to take profits when things are overbought. But to fail to get in again when price retraces will keep profits low, if all you are doing is scaling out. This is again why I recommend a trendline or EMA to serve a baseline to look for BUY signals again. (BUY LOW SELL HIGH,....basic tenets of trading). It seems you want to trade around a CORE position by selling a portion when things are overbought but you should also add when things are oversold (usually at or near the trendline or EMA). One example in your AAPL trade is that you sell ALL of your position at $11 when overbought in 1-06 as per your signal but BUY again when oversold at trendline/EMA in 7-06 around $6.50. There are other times where price may not retrace entirely to the trendline and OBJECTIVE EMA would help. Look at AAPL in 2-05 and your SELL signal would tell you to get out but price retraced close to but did not hit EMA 52 around 5-05. If you only sold you would miss out on the growth compared to buy and hold. Its hard to get more specific than this because I dont know enough about your system but scaling out it a bad idea in most cases. Also straight division of your account into equal $60K amounts also does not appropriately limit risk. Eganon