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New trading strategy testing

Recently I was working on a new strategy on picking stocks. I always wanted to develop mechanical trading – a sort of rules which would allow me to eliminate human emotions from trading.

Human emotions are the worst enemy of every trader and investor. They make us do stupid things on the market. They force us to buy when prices are on top and sell when they are on the bottom. We tend to panic when we see prices falling or be overly optimistic when prices are rising.

I wanted to make my investing or trading as mechanical as possible to put emotions aside. I wanted to be trading as mutual funds do. They have certain sorts of rules and they strictly follow them without questioning or second guessing. You buy selected stocks when they meet your criteria and sell when they no longer meet them.

But even if we have such rules, we posses lack of discipline to follow them. We have excuses we double guess them or we even do the exact opposite. Many investors do not even have them written down and do not remember them.

So I created a set of my rules and created a screener based on them. The rules are based on fundamental and technical metrics and calculated expected return. Based on those metrics I then assign rating to each stocks and sort them from the best to worst rating. All this is now automated. My program screens all stocks everyday, compares the metrics to my requirements and assign rating. Everyday I have a list of stocks I can invest in.

What happens next? I take first 10 stocks from the list and buy them.

Then I hold the stocks as long as their rating is over 50% of the entire rating scale. When the stock drops to 50% of the rating scale I sale. No analysis, no exceptions, no guessing.

I decided to test this strategy (actually the rating system) for 1 year. Although I did some back testing and the results were promising I still want to test this in real time trading. Therefore I opened a simulated account with $100,000.00 initial value and will trade this system for one year with simulated money. If the system proves profitable I will adopt it and use in one of my trading accounts.

I will also report the results on regular basis so my readers can see how the system works.

Here is the current account value:

I still will continue my dividend growth strategy on my TD and ROTH accounts. If this strategy turns out to be a winning one, I might use my Scottrade account to use it.

What about you?

If this system shows up as working system, would you be interested in it? Do you like to have a system which would cut your emotions and doubts when selecting stocks?





2 responses to “New trading strategy testing”

  1. Ben says:

    This is a great idea. I almost always think it’s a good idea to automate and have a rules-based process that you can follow through thick and thin to avoid using your emotions in your decisions.

    Good luck with the new strategy.

    • Martin says:

      Ben, I am still testing it and see how that would work. If the results will be great, then it will be a great one and exactly as you said – fully automated (well I still will have to place orders manually, but as the grading system selects the stock I will buy it, as it drops the stock I will sell it. I like the idea, let’s see how the grading system would work.

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