Please Critique (Poke Holes) in My Entry/Exit Strategy

B

baggs

Long time lurker, first time poster.

Goal: 15% or greater per year (averaged over 5 years).

Account Size: Approximately $900,000 (taxable acct)

Timeframe: Weekly

Position Strategy: Ideally 15 open positions, approx $60,000 each.

I won't be going over how I decide which stocks to trade in this thread. Just know that they're chosen objectively based on about 12 metrics. They're typically "Growth" stocks.

I've been working to get away from any discretionary trading/investing this year and have developed something that seems to work. I've backtested, and tested live myself the last 6 months with smaller positions. However, as we all know, everything tends to look good, until it doesn't.

I'd like some help poking holes in the math of my entry/exit (scaling) strategy.

Below are some visuals to help.

All entries/exits are objectively identified by my "system" in real time. All buying/selling takes place just prior to close for the week. All examples shown below have met all criteria at the time of the theoretical trades. Typically, only 15-40 stocks meet the criteria at a given time. Seriously, there's no confirmation bias here. I've backtested all qualifying stocks. I'm not handpicking winners as examples.

Explanations and questions below charts.
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I can add more charts if needed.

Again, these entry/exit triggers are 100% objective in real-time. No analysis on my part whatsoever.

Anyway, here's how I've been scaling:

  • Enter with full position (on Green) ($60,000)

  • 1st exit trigger = Sell $15,000 of position

  • 2nd exit trigger = Sell $15,000 of position

  • 3rd exit trigger = Sell $15,000 of position

  • 4th exit trigger = Sell $15,000 of position

  • 5th exit trigger = Sell $15,000 of position (likely to close out position)

  • 6th exit trigger = Sell $15,000 of position (likely to close out position)

Re-Entry (assuming stock still meets criteria):

  • 2nd Entry without an exit in between = Add $15,000

  • 3rd Entry without an exit in between = Add $15,000

  • 4th Entry without an exit in between = Hold

  • Re-Entry after 1-5 exits = Add to get position back to $60,000
All cash that's been taken out of a position will be put to use in another position as soon as a signal is triggered.

Questions for You:

I know 'averaging down' is typically frowned upon. However, my testing has provided positive results.

I want you to show me why this is a bad idea. I feel like I'm missing something obvious.

I typically come up with a strategy, it looks great in the testing, then I trade it for months and it continues working. Then one day, I realize why it won't work long term. I'd like to save some time. What am I missing? Should I just buy and hold instead? Why?

Is there a better way to enter/exit using these signals?

Please don't just say "it sucks" without any data/reason to support.
 
I see a lot of red stripes in bull markets... and then you buy again higher...

Apple and Google don't look great in this.
 
To make it easier:

Green lines = $60,000 entry
Red lines = $15,000 profit taking (remaining position is still being held)

Generally speaking
 
minmike said:
For such infrequent enteries, test over some bear markets. 2000, 2008. Times when doubling down dont work.
More...

The last 3 charts cover the 2008 fall. You'll see that in each those cases several profit taking signals were triggered before the fall. Meaning, that the initial $60,000 position (for each stock) was whittled down to very small positions when the drop came. Which is a good thing.
 
baggs said:
To make it easier:

Green lines = $60,000 entry
Red lines = $15,000 profit taking (remaining position is still being held)

Generally speaking
More...

Okay, that looks better...

Do you keep 100% invested? So when you sell you buy something else? Otherwise I think you miss-out on major bull markets....

And same when buying?

What happens when we enter a bear market? Do you switch to 15k buy entries and 60k sell?

Otherwise your system is very skewed... geared to a bull market, if re-buying other stocks when selling... if you don't even do that, I doubt you get decent returns above benchmark.
 
I will take a stab at some constructive criticism I think may help.

I may be interpreting your charts incorrectly but it appears that the green line is an entry and the red lines are partial exits. However, it appears you do little or no trading based off the actual chart and rely on some other method to determine exits. It also appears that there is little in the form of risk management here.



Entries,...Your entries appears to be solid (from the limited charts I see here) and I think you should focus on exits. But a couple things to discuss on entries first. I agree with full position (or near full position) at entry. I tend to use one entry and one exit in most all cases. However, I also average down but with VERY SELECTIVE and SPECIFIC rules. But my second piece of the position is always smaller than the first because I have what I consider a MAX risk I am willing to take (we will get to that in next section). I think as long as your specific rules say BUY again then the market has just given you a gift to let you average down at a better price. BUT, what about when you are wrong?? You have shown several cases that worked out but I am sure you dont have 100% winniners. Your entries need to be as close to where the rules say to get out of the trade (stop loss) as possible. I dont see any description of stop loss here or how you determine when a trade is WRONG. The closer your entries are to your stops the more of your account you can place in the trade. The wider your stops are from your entry price then your random $60K each trade will mean you are risking more of your account than necessary. So if you average down and your stops are wide then you are compounding this problem. If on a losing trade your stops are tighter then averaging down will mean you are compounding the problem but to a lesser degree than with wide stops. It appears most of your entries catch a low point before price takes off. So, on these examples it seems solid but I urge you to think about the times when your trades turn into losers.

Exits,... on these I think scaling out it a bad method. The exits of scaling out means you are limiting your ability to ride the winner and compound your profits. You are removing 25% of your win and when the 2nd exit comes you eliminate another 25% and when you have the MOST profit to make you are only with 25% of your initial trade because you sold several times on the way up. It seems that some of your exits particularly the 3rd exits come just after a rapid rise or spike in the price. I tend to agree that when there is a spike you take profits because price will not stay rocketing up and will correct sharply in many cases. THATS a good time to take profits. So, in your examples a simple rule like when the trend is at 45 degree angle stay in the trade. When it spikes at a steep angle (>45 degrees) stay in until it starts to retrace and then exit entire position. This will max your profit more. It appears that with your trades you are looking for growth so those are stocks you anticipate will have a strong trend up in price. Then stay with the trend until it is no more or its consolidating. What is it about some of your exits that make you get out. It seems some exits are as price starts to break a short term trend line (just eyeballing that). For example, look at GOOGL on 3-10-14 or AAPL on 9-24-12. These are ideal exits to max profit and exit entirely. If you exit at these points you will be far better off than scaling out with only a small portion of your original position exiting at these points. You have not described why you exited at these points but your goal should be to identify these points when trends are breaking there strong move and consolidating or retracing. Sitting through those are time wasters.

Risk,...randomly saying $60K/trade is potentially too little or even too much per trade. IF your stops are wide you risk more. You should base your amount per trade on how wide your stop is to keep risks equal across trades. I tend to risk 0.75% per trade at initial entry and most trades have this single entry. On the occassion I get a gift and the market lets me average down do so ONLY if all my other BUY criteria are still met at this new lower price. If not,....dont average down. If so I add max 0.25% for a MAX RISK per trade of 1%. This could be $60K or $30K or >$100K or whatever. The volatility of the stock will determine how much. Do you really want to risk $60K on IPG as you are on AAPL or GOOGL?? Look at that volatility. Do you feel comfortable riding that bucking bronco with $60K? I personally would rather risk less on a volatile stock because it can always turn against you as hard of not harder. Downward moves tend to be more volatile than up moves so risking $60K on volatile stocks can mean you get big swaths of your account taken out at a time.

I hope this helps. But the bottom line is that MAX position entry means MAX risk at entry but scaling out means LOWEST profit when the trade is going in your direction. You need to think more in terms of risk of your account and maximizing profit. What is it about your rules that allowed you to exit at these particular points before retracements or consolidations?? Do more of THAT and exit entirely in one fell swoop. You should also backtest your system in bear markets and consolidating markets. You have chosen charts/stocks in a strong bull market. But we will not be in this market forever. Test in 2006 to 2009 or other weak years.

My $0.02,

Eganon
 
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