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This will be the first stock portfolio post we provide on this blog. The main purpose of techandstocks.com is to offer insights into current trends in technology, including products, research, gadgets, and electronics. Additionally, we aim to provide information on companies involved in creating these products through investing with stocks.
One of the investment strategies we employ here is inspired by Andreas Clenow’s trend trading strategy, which he shares in his book Stocks on the Move. This book serves as a comprehensive guide to systematic trading strategies for stocks. Clenow presents a robust framework for constructing and implementing trend-following strategies, with an emphasis on risk management and portfolio diversification. The book delves into practical aspects of quantitative trading, making it accessible to both novice and experienced traders, offering valuable insights into trend-following approaches to optimize investment performance.
Here’s a simplified overview of how he ranks stocks in his book:
- Price Momentum: Clenow emphasizes the importance of identifying stocks with strong price momentum. He typically looks for stocks that have demonstrated consistent upward price movement over a specific period, such as the past 12 months.
- Relative Strength: Clenow compares the performance of individual stocks to a benchmark index, such as the S&P 500. Stocks that outperform the benchmark are given higher rankings. This approach helps identify stocks that are not only moving but also performing better than the overall market.
- Volatility and Risk Management: Clenow considers volatility and risk when ranking stocks. He prefers stocks with relatively lower volatility and employs risk management techniques, such as position sizing and stop-loss orders, to protect the portfolio from significant losses.
- Diversification: Clenow advocates for a diversified portfolio. He suggests not putting all your capital into a single stock but spreading it across multiple stocks to reduce risk.
- Rebalancing: The ranking of stocks may change over time as new data becomes available. Clenow recommends periodically rebalancing the portfolio by selling underperforming stocks and replacing them with higher-ranked stocks.
- Quantitative Models: Clenow’s approach is based on quantitative models that use historical price data and mathematical calculations to determine rankings. This reduces the influence of emotions and subjective judgments in stock selection.
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It’s important to note that the specific parameters and formulas Clenow uses in his ranking system may not be disclosed in detail in the book. Readers interested in implementing his strategy are encouraged to conduct further research and possibly consider consulting his book for more specific guidance on the implementation of the strategy. Additionally, the stock market and investment landscape can change over time, so it’s essential to adapt strategies to current market conditions.
In summary, our strategy, based on Clenow’s book, begins with the definition of a ‘stock on the move,’ which essentially refers to a stock that is trending or exhibiting momentum. Drawing a parallel to Newton’s first law of motion (the law of inertia), such stocks tend to maintain their current trajectory unless acted upon by an external force. Therefore, by identifying stocks in motion, we aim to capitalize on their price changes, avoiding those that remain stagnant.
One of the most challenging aspects of a systematic trading strategy is the need to adopt an agnostic mindset regarding the fundamental drivers behind a stock’s movement. All decisions are solely based on price action, which presents both advantages and disadvantages. With the rise of systematic trading, predicting and reacting to stock market movements has become increasingly difficult. Trying to decipher the direction of a trade based on news and company events is complex. This is where a diversified portfolio and appropriate position sizing come into play to help navigate these challenges.
The system we employ here has the following rules:
- Member constituent of the Nasdaq 100 or S&P 500
- Top 10 ranking of the momentum indicator
- Close has to be higher than the 200 day moving average
- First trading day of the month
- Trades are closed at the end of the month. Position sizing for stocks that are still in the top rank at the end of the month are recalculated.
- Position sizes are based off of an ATR(20) calculation to distribute risk across the ten names.
Below are the backtest results on the Nasdaq 100 dating back to 1994. The backtest is performed in Amibroker using Norgate data, which accounts for historical constituents entering and exiting the index, eliminating survivorship bias.
Not accounted for are trading costs, given that most brokers now allow commission free trading, and slippage. The system does not employ any stops as they negatively impact performance with this system. Moving forward, we do believe its possible to employ some type of protective stop strategy with anchored VWAPs, as these provide solid technical levels for those who employ a more technical trading or investing strategy. For this, we like to use custom codes in AmiBroker, or TradingView.com for advcaned charting. We will share monthly updates to the portfolio, including position sizes and selection rules.
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