What is this system, and why does it work?
This is a stock trading system.
Based on academic research and my backtesting, strong stocks are likely to continue in the direction of the trend.
It’s why this system looks to buy breakouts.
Now I want to be honest here…
I’m about to share the trading strategy with you isn’t mine originally.
I have studied the works of other quantitative traders like:
- Andreas Clenow
- Nick Radge
- Emilio Tomasini & Urban Jaekle
I want to give credit where credit is due.
With that said…
Let me give you the exact trading rules to do this…
We are going to be trading stocks in the Russell 1000
Market: Stocks in the Russell 1000
These are the largest 1,000 stocks in the U.S. stock markets.
They are liquid enough for us to enter and exit with relative ease.
Next, we will use a simple trend filter.
Trend filter: Russell 1000 is above the 100-week moving average
Why do we need a trend filter, you may ask?
Well, because we only want to be buying when the overall stock market is in an uptrend.
We don’t be buying when the market is in a recession because this won’t put the odds in our favor.
Simple as that!
Entry: The stock price has closed above the 50-week high (on the weekly timeframe); Enter on Monday’s open
This is a weekly trading system.
That’s right; you can trade the system while having a full-time job!
You don’t need to watch the markets all day.
Now once the stock has closed above the 50-week high, you’ll want to enter that stock at the market open during Mondays.
So, when the market opens on a Monday, you enter the trade.
Make sure you’re taking notes because this is important!
Exit: When the stock price has closed below the 40-week low
The exit rule is pretty self-explanatory, but I’ll share how to spot that later on with you.
Ranking: Stocks that have increased the most in price over the last 50 weeks
There are 1,000 stocks in the Index.
If 50 to 100 stocks are making 50-week highs, which stocks do you pick?
Do you just put a blindfold and throw a dart on which stock to buy?
Of course not!
What we’ll do is we will use a stock filter that ranks the strongest stocks over the last 50 weeks.
A stock filter will help us filter out the strong stocks from the not-so-strong stocks.
For risk management, it’s pretty simple.
Risk management: 5% allocation of capital per stock with a maximum of 20 positions
Why a maximum of 20 positions?
Simple, 5% multiplied by 20 equals 100, which means all of your buying power will be used up!
That’s right; there’s no leverage involved for this system.
For example, you have a capital of $100,000.
What you’ll do is you allocate $5,000 to each stock.
But you might be thinking:
“Wait a minute, how do I know how many shares of stock can I buy?”
Let me show you.
Just take $5,000 and divide it with the stock’s price.
Now, let me give you a few charting examples so you can see how this works