Hypothetical Monthly Momentum Portfolio vs. Index

[willy1111]

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[Trav.]

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.

 

[willy1111]

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.

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[willy1111]

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.

 

[CanOz]

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?

 

[willy1111]

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.

 

[willy1111]

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.

 

[CanOz]

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.

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.

 

[InsvestoBoy]

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.

 

[willy1111]

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

 

[Skate]

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.

 

[willy1111]

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.