# Hypothetical Monthly Momentum Portfolio vs. Index



## willy1111 (29 September 2018)

This thread is intended to be a journal/diary/real time tracking of a HYPOTHETICAL Monthly Momentum Portfolio VS Index (All Ordinaries Accumulation Index).  None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.

Ever since Buffet made remarks that the average man in the street would be better off investing in index funds, and his famous 10 yr bet against the hedge funds, the masses seemed to have jumped on board this theme as well.

I'm of the belief the Indexes can be beaten over the long run, @peter2 did an excellent job with his thread that ran for nearly 3 yrs - Mar 2015 to Mar 2018 - inspired by his consistent posting/updating I have decided to start this thread.

There are numerous other members here who appear to do well too, but choose not to divulge too much which is fair enough.

There are many different styles/approaches to the markets, I have chosen a systematic monthly momentum/trend following style as it seems to fit best with my personality.  I am able to code rules and back test them, helping to create belief that what has happened in the past is likely to happen in the future - although I am firmly aware that it is no guarantee of what may happen in the future, I am also very aware of the limitations of back testing.

For simplicity sake, I will be allocating up to 20% per position - which ordinarily I would say is too high/too much risk - but by doing so, administering the hypothetical portfolio will be much easier.

There is not likely to be a lot of action here, but I intend to show the Portfolio updates on a monthly basis, comparing the Hypothetical Monthly Momentum Portfolio VS the Index and any new entries and perhaps charts of closed trades.  Hopefully this lack of action will make it easier for me to post on a consistent basis over the long term.

Given it is a rules based approach, and a bit slow to get started, I have gone back 12 months - to 1 Oct 2017 - and created what I will show going forward, I will post each previous month up over the next week, so we can see how it has performed over the last 12 months and then will carry on with it in real time from then on.  Being such a high conviction, 5 or so share portfolio, I expect quite a bit of volatility.

None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (29 September 2018)

These are the types of positions the system attempts to capture.  Simple momentum/trend following system.

None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (29 September 2018)

Month 1 - October 2017 - Recreated
	

		
			
		

		
	



None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## Trav. (30 September 2018)

Hi willy1111

I will follow this thread closely and with me being somewhat of a novice I would appreciate it if you could give a little more background on the setup of the system


Software / language used to code
Outline of the rules coded
Close on high
Volume %
MACD cross over
etc

Position size is stated but do you use stop losses?
Do you care when the trade is placed at ie. end of day or even on a specific day ie Friday afternoons?
Do you consider the dividend when selecting a stock or purely growth
NWH has a 84% return for the year but only a gross Div of 1.36% suggesting that you are not looking at the dividend.

Again this is something that I am very interested in but get frightened off, especially when I look at CanOz thread (CanOz's intermittent and sporadic trades).

Thanks

Trav.


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## willy1111 (30 September 2018)

Trav. said:


> Hi willy1111
> 
> I will follow this thread closely and with me being somewhat of a novice I would appreciate it if you could give a little more background on the setup of the system
> 
> ...




Hi Trav,

Thanks for your post and interest.


I use Amibroker and Norgate Data Platinum

I don't wish to provide the exact parameters and variables as to what constitutes a buy or sell signal.  They are not discretionary, they are rigid rules, ie a buy must meet criteria 1, 2 & 3 etc - and a sell must have fallen and closed through a set threshold - marked on the above charts as a red line, it follows the price higher as it moves higher.

Stops are not active in the market, if the price closes below my sell threshold - only checked at the end of each month, a Good Till Cancelled (GTC) Limit Order is placed to sell the position.  If the price doesn't trade above my Limit Order by the end of the month (probably happens 10% of the time) I will adjust the limit order at end of the month for the next month until eventually it is sold.

I am not trading this system it is a Hypothetical Portfolio so no orders are being placed.  However, being a Monthly System, the trade/orders would be placed only once a month - between 8pm on the last day of the trading month and before 10am of the first day of the trading month.  The GTC Limit orders would stay in the market for the month.  That way, after the orders are placed I don't need to look at it again until end of the next month, I can go away, get on with life and let the markets do its thing.  In about 10% of cases, my limit order wouldn't be filled, for buy orders if the stock meets the criteria the next month, I would just amend the GTC Limit Order up, and for sell orders I would just amend the GTC Limit Order down.  This approach also means I am not constantly watching market depth during trading hours trying to get a better price.  The same approach could be used if trading on a daily or weekly system.

Dividends are good but not crucial, I am more interested in total return in a systematic minimal time input approach that outperforms putting funds in the Index.  The idea is to compound away a nest egg, once the nest egg reaches a certain size, if the dividends are not sufficient to support a lifestyle a bit of the portfolio may be sold down once a year or so to fund lifestyle.
I don't profess to have all the answers, I have seen and read numerous different approaches/styles towards the markets and there are many that work.  One needs to go through enough, to find what suits their personality and lifestyle.  I came across a very successful day trader/educator in the UK, but this approach required sitting in front of a screen watching charts for hours per day making discretionary calls on the fly.  That didn't suit my lifestyle or personality.  I've looked at fundamental screens to locate stocks, but I couldn't put a strategy around it that I believed in enough as it was too difficult for me to backtest.

The educator who's style/approach and philosophy that has resonated most for me has been Nick Radge, if you are interested in parameters and variables that go into a system to determine buy/sell signals, his book Unholy Grails goes through quite a few - all with backtested data - this would be a good starting point if this is the approach that makes sense to you.  You also need to combine that with money management/position sizing (also covered in his book) and belief (from backtesting) that what you are doing will work into the future.


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## willy1111 (30 September 2018)

Month 2 - November 2017 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (1 October 2018)

Month 3 - December 2017 - Recreated
	

		
			
		

		
	



None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (2 October 2018)

Month 4 - January 2018 - Recreated 


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (3 October 2018)

Month 5 - February 2018 - Recreated 



None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (4 October 2018)

Month 6 - March 2018 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (5 October 2018)

Month 7 - April 2018 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (6 October 2018)

Month 8 - May 2018 - Recreated
	

		
			
		

		
	



None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## CanOz (6 October 2018)

I'm thinking that capital division by 5 doesn't expose one enough to capture a sufficient number of multi baggers required to out perform the index?


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## willy1111 (6 October 2018)

CanOz said:


> I'm thinking that capital division by 5 doesn't expose one enough to capture a sufficient number of multi baggers required to out perform the index?




That's a fair suggestion. 

We shall see - hopefully I can keep it running for the next 5 years plus - assuming the forum will still be here 

I wouldn't run such a limited capital allocation portfolio with my core funds in the real world (maybe a satellite/speculative portfolio separate to my core portfolio) - and wouldn't recommend it.  A string of losers could result in quite a large draw down when allocating so much per position - but on the other hand having such a high allocation to a 10 bagger will have a massive boost on returns.  I expect the returns to be very volatile/lumpy, allocating capital to more positions would definitely smooth things out and is what I do with my core portfolio.

Ultimately the same profitability rules should still apply in that around 50% win/loss ratio with wins 2+ times bigger than losers on average.  Flipping a coin is a 50/50 chance it will land on heads or tails, but that doesn't mean we can't have a string of 10 heads in a row, flip it enough times and it should theoretically come back to 50/50. The risk with such a small allocation is that we start with a string of losers before getting on a multi bagger, but as long as we survive long enough to get through enough trades I would expect the edge to still play out.


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## willy1111 (7 October 2018)

Month 9 - June 2018 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## CanOz (7 October 2018)

willy1111 said:


> That's a fair suggestion.
> 
> We shall see - hopefully I can keep it running for the next 5 years plus - assuming the forum will still be here
> 
> ...




I need to get my head around this, but i suspect there is still a sweet spot somewhere around 5-15 positions. I'll write to Nick, unless perhaps you have done the research already? I don't want to detract from your thread, i'm just curious.

I'm also curious about the universe selected, but i'll save that for another post.


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## InsvestoBoy (7 October 2018)

If you have access to markets outside Australia, there are plenty of ETFs that trade momentum portfolios which is much more tax efficient than you running one yourself.

QMOM and IMOM are two long-only ones that I follow closely which trade in the US (IMOM holds global portfolio though). There is also MOM which is market neutral (i.e. also shorts low momentum stocks).

In Australia they have started opening up multifactor ETFs like AUMF, EMKT and WDMF which all have some momentum exposure as well as other well-known factors like value.

Both value and momentum factors have positive alpha, and negative correlation to one another.


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## willy1111 (7 October 2018)

CanOz said:


> I need to get my head around this, but i suspect there is still a sweet spot somewhere around 5-15 positions. I'll write to Nick, unless perhaps you have done the research already? I don't want to detract from your thread, i'm just curious.
> 
> I'm also curious about the universe selected, but i'll save that for another post.




For a longer term momentum/trend following type system like this, highly likely Nick will say the sweet spot is 20 positions for risk/reward


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## Skate (9 October 2018)

CanOz said:


> I need to get my head around this, but i suspect there is still a sweet spot somewhere around 5-15 positions. I'll write to Nick, unless perhaps you have done the research already? I don't want to detract from your thread, i'm just curious.
> 
> I'm also curious about the universe selected, but i'll save that for another post.




CanOz, I've have put that question to Nick about position sizing - Nick's answer was that his testing indicated the sweet spot is 18 positions.

My next question was - "well if the sweet spot is 18 positions why is that not used in your strategies"

Nicks response - I'll leave that for another post as well..

Skate.


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## willy1111 (9 October 2018)

Month 10 - July 2018 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (10 October 2018)

Month 11 - August 2018 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (12 October 2018)

Month 12 - September 2018 - Recreated


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## Wyatt (22 October 2018)

Hi Willy,
Thanks for starting a fresh systematic trend following thread. From memory our last TF thread was created by Trendnomics and his portfolios did incredibly well until he/she seemed to get frustrated with the apparent lack of interest. 

I think this style of investing is a valid method and tries to exploit the known anomaly of momentum, whilst providing a tool to avoid the pitfalls of the often irrational collective human mind during pullbacks. Trend following is counterintuitive,(buying stocks that have already taken off) so it is not easy to follow and it goes through sometimes longish periods where it just does not work and drawdowns can be ugly, which are eventually followed by a period of strong outperformance. It is not for everyone.

I particularly like the concept of monthly rebalancing, where whatever happens mid month, can have little impact by the end of the month, although when i tried it in Jan 2016 with 25 stocks on a 250 day lookback,  I found it too hard to adhere to and now do it weekly on a shorter lookback with around 16 stocks to increase the chance of jagging a few runners. One day when I grow a set, I give it another go.
Imagine that, only being on task for an hour or so each month and little interest in between.

Understandably you have put a lot of time into your system and you want to keep your secret sauce private, but I hope you don't mind me throwing out a bit of food for thought to interested readers. The following backtest are for 5 x 20% positions (not something I would do) on XAO with 125 day lookback with 100ma exit along with a stale (ranking) exit in there with no stops. Curiously we did not share any stocks over the same period, which possibly suggests when conditions are right, momentum systems broadly work well.

The last 12 months have been great theoretically. 



 The previous 12 months were terrible with a 25%DD thrown in for good measure



Going back another 12 months were again theoretically fantastic



Going back a bit further, the overall results look good, but you would have to be a machine to sleep at night. Nevertheless the results are well above that of the said index XAOA



Willy, I and no doubt others would be curious to see some of your longer period backtests, if you're interested.

Wyatt


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## Trendnomics (22 October 2018)

Following this thread with interest. 

Please post some long term back-test results for the system.


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## willy1111 (23 October 2018)

Wyatt said:


> Going back a bit further, the overall results look good, but you would have to be a machine to sleep at night. Nevertheless the results are well above that of the said index XAOA
> View attachment 89935
> 
> 
> Wyatt




Hi Wyatt,

Thanks for your interest, you have just proven the point of the thread - the indexes can be beaten - no need for me to continue the thread, lol 

I don't wish to take the thread down that path, of comparing backtests, monte carlo, system inputs, etc.  Although it could be a very good topic if you wanted to start a new thread to help the forum create more non general chat content 

Oh and I don't trade this system in real time nor do I recommend it, it is Hypothetical.


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## willy1111 (23 October 2018)

Trendnomics said:


> Following this thread with interest.
> 
> Please post some long term back-test results for the system.




Hi Trendnomics,

Welcome back.

I don't wish to take the thread down that path, of comparing backtests, monte carlo, system inputs, etc. Although it could be a very good topic if you wanted to start a new thread to help the forum create more non general chat content


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## Wyatt (23 October 2018)

Hi Willy,

Fair call. 
This is your thread and I respect your wishes and like you say, I or someone else could open a new thread discussing the many aspects of trend following systems any time they like. Maybe even revitalize Trendnomics thread to stimulate conversation on this fascinating subject. 
I will be looking forward to your monthly updates.


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## willy1111 (1 November 2018)

Month 13 - October 2018


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (1 December 2018)

Month 14 - November 2018 


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (2 January 2019)

Month 15 - December 2018
	

		
			
		

		
	



None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## willy1111 (1 February 2019)

Month 16 - January2019


	

		
			
		

		
	
  None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time.


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## Newt (9 February 2019)

Nice going willy1111, have just been reviewing your thread.

Bit late, but the issue of no of positions and resulting returns is an interesting one, and I've attached a hypothetical "returns versus number of positions" from a weekly trend following system backtest run over many financial years.

Of course total profits is not the only consideration here.  You should do some Risk of Ruin calcs and simulations as well - getting under 10 positions for trend following starts to exponentially magnify  that risk if you're unlucky enough to start trading in a large market downturn (and we never know what will happen).  Trading too many positions can start to drastically dilute returns (position sizing is often the special sauce on any system).

These sorts of backtests often show a tempting spike in returns for a small number of positions (e.g. n=3 below) reflecting the luck of having a small number of big winners, but for the system used for this backtest I'd usually aim for 13 -15 positions (slightly more rather than less for bit extra safety)

Anyhow, many of my weekly systems created in recent years come up with similar graphs to this.
The actual returns is less important here than the shape of the curve BTW - so many things can give over-optimistic return estimations in backtests!


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## Newt (9 February 2019)

Just following from this, same backtest but this time looking for optimal CAR/MDD (returns to max drawdown ratio) versus number of positions.  Similar, but importantly different story.  Max 15 positions like much more tempting....


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## peter2 (11 February 2019)

Hey @Newt nice work. I would love to see the results for portfolio positions up to 50.  Is this possible with your back test software?  Both CAR and CAR/MDD please.


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## willy1111 (11 February 2019)

Thanks for posting @Newt.

Perhaps it would be helpful if you could also post the start and end date of any backtests.


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## Newt (11 February 2019)

Hi Peter and willy

I almost ran these Amibroker optimization runs out to 40 positions in the first instance, but.....

- please bear in mind this weekly TF code may not bear any resemblance to willy1111's monthly system, or Skate's hybrid system (and thank you peter for alerting me to Skate's thread in the first place, in your weekly system thread!)
- I still emphasise CARs can be misleading but hopefully the shape of the curves are useful (e.g. no slippage included in this modelling)
- digging back through notes I'm fairly certain I ran a time interval of 1/1/2014 through to 9/2/2019
- the CAR/MDD curve is now slightly different - either I didn't get the dates spot on, OR the weekend database updates from Norgate (that I ran Sunday night) have had an effect - eek - historical bias??
- stock universe is ASX fully paid ordinary (much larger universe than XAO) and again, may have changed slightly during Sunday updates
- this particular system includes PositionScore code to stop me being paralysed by multiple entry signals - otherwise multiple runs could/would be slightly different
- step size for the optimization runs was 2 - tends to smooth out noise if you run and display values for every number of positions 1-50

Would be interested to see anyone else's optimisation runs for weekly or monthly systems by position size.


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## Newt (11 February 2019)

Information overload, but this is same stock universe, same time period, using different system code (my Amibroker interpretation of Nick Radge's "Weekend Trend Trader").

Again, also remember trading the "optimal" = "most aggressive" number of positions may give you max theoretical returns but also DRASTICALLY increase your Risk of Ruin (i.e. chance of blowing your account, particularly in the first 2 years).

Suggested reading:
http://bettersystemtrader.com/riskofruin/


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## peter2 (12 February 2019)

Thanks @Newt for doing that. 
For all the system back tests you've shown the sweet spot for RR is 14 - 16 positions. For my position sizing model (fixed fractional) a trade risk of ~0.7% will allow 14 - 16 positions. 

@willy1111 Thank you allowing us this small diversion in your thread.


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## Newt (12 February 2019)

peter2 said:


> Thanks @Newt for doing that.
> For all the system back tests you've shown the sweet spot for RR is 14 - 16 positions. For my position sizing model (fixed fractional) a trade risk of ~0.7% will allow 14 - 16 positions.
> 
> @willy1111 Thank you allowing us this small diversion in your thread.




Interesting area, happy to help.

Believe may have seen Captain Black say 17 positions tends to be close to optimal for number of positions for trend following systems in ASX.  Not sure I could find it quickly now - think it was halfway through Skate's Dump It Here thread.


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## Skate (12 February 2019)

Newt said:


> Interesting area, happy to help.
> 
> Believe may have seen Captain Black say 17 positions tends to be close to optimal for number of positions for trend following systems in ASX.  Not sure I could find it quickly now - think it was halfway through Skate's Dump It Here thread.






captain black said:


> I'm sure Skate will add more, but around 20 positions is the sweet spot for a trend following system.
> 
> 
> 
> ...




https://www.aussiestockforums.com/posts/1010538/

Running 3 strategies in one (Hybrid strategy) my position sizing should range between 51 to 60 positions

53 was the sweet spot but I settled on 40 for rounding.

Skate.


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## Newt (12 February 2019)

Skate said:


> https://www.aussiestockforums.com/posts/1010538/
> 
> Running 3 strategies in one (Hybrid strategy) my position sizing should range between 51 to 60 positions
> 
> ...





Aha.  Thanks (yet again) Skate for sharing.


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## peter2 (12 February 2019)

@Skate Very interesting that your testing shows 53 is optimal number of positions whereas most trend following systems indicate 15 - 17 with most people happy to use 20. 

Why is there such a difference if all systems are trend following systems? 

Three entry strategies would get you into trends earlier than most and you mentioned that you're not doubling or tripling up when multiple systems select the same stock. I would accept that your exit strategies would exit slightly earlier than most trend following exits. So overall I accept that the Hybrid strategy will do a slightly better job than most mainstream trend following systems but I fail to understand why there's a huge difference in the optimal number of portfolio positions between apparently similar systems.


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## peter2 (12 February 2019)

Sorry, I will re-post in the Dump it here thread as it's a question for Skate.


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## willy1111 (28 February 2019)

Month 17 - February 2019


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time


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## Newt (1 March 2019)

Would be nice to know bit more about your hypothetical system willy1111 if possible.

If I understand correctly, your searching for momentum and possibly rebalancing to stocks with highest position score (based on ROC or something else), possibly using Amibroker rotational trading code?  Is it possible to share a bit more without giving away specifics you're uncomfortable about?


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## willy1111 (1 April 2019)

Month 18 - March 2019


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time


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## willy1111 (1 May 2019)

Month 19 - April 2019


None of the shares mentioned in this thread are recommendations, nor is this strategy recommended to be traded real time


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