AlgoTrendTraders Special Report - May 31, 2022
Disciplined, Rules-Based Trading
Thomas Meyer, Editor
May 31, 2022
Welcome to an AlgoTrendTraders special report. In this report, we’re going to look at the results of the signals and trades for both the S&P 500 (SPY is the ETF) and the Nasdaq 100 (QQQ is the ETF) since October 2019.
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This free weekly report was first published on July 12, 2021, and has been published each week since (the weekly commodity report was first published on October 18, 2021).
Before these reports were introduced, I was the editor for Short the World (published in London through Southbank Investment Research) and AlgoTrendTraders (published in Melbourne through FatTail Investment Research). I was fortunate to work with many outstanding people and have friendships that continue to this day.
In both of these newsletters, trading signals were given for the S&P 500 and the Nasdaq 100. Since publication of this newsletter started, we’ve been using SPY and QQQ as these are easiest for individual investors to use.
The following statistics are for information only. They do not include commissions, fees, taxes, or any other charges. The statistics are based on pricing information downloaded through a third-party and have not been corroborated with any of the exchanges. There is no guarantee that any investor could have gotten into these trades at the listed prices or exited at the listed stops. Both of these indices are highly liquid, but different markets can have different prices. Those investing in Australia or the UK could have currency fluctuations that are not taken into consideration in this study.
If you read this week’s Free Report, you saw this updated chart that shows the overview of this trend-following strategy. By the way, this chart does not include the two bearish trades that are currently in place.
Here’s a more in-depth look at the numbers that make up the above table.
First trade date:
S&P 500 (SPX) – October 21, 2019
Nasdaq 100 (NDX) – October 14, 2019
Largest winning trade:
SPX short trade 3/2/2020 – 3/24/2020 +19.75%
NDX long trade 5/11/2020 – 2/22/2021 +39.38%
Largest losing trade:
SPY short trade 3/14/2022 (less than 1 week) -3.22%
NDX short trade 3/23/2020 (lasted 1 day) -5.70%
Index level at time of first trade:
SPY – 299.42
QQQ – 190.82
Index closing level on May 27, 2022
SPY – 415.26
QQQ – 309.10
Gain in Index since opening trade in 2019
Just doing a quick look at the average returns in the above table and adding them together, the potential total returns on the trend-trading strategies exceeds the returns on buy-and-hold for the same period of time with considerably less risk than the buy-and-hold strategies!
The key to the winning trades greatly outperforming the losing trades is the risk management system. If a trade moves against us, we’ll get out of the trade with a small loss. But if a trade trends higher for weeks or months at a time, we have the ability to build up substantial profits.
Trend-traders will never get in at the bottom and will never get out at the top. No system can do that. Our goal is to get into a trade, make a reasonable percentage of the move higher (or lower when bearish) and get out when the trade moves against us.
If you’re looking to make a ton of money in a short time, you’re going to be disappointed. Trend-trading is not fancy; it’s boring, and takes time to be successful. This is a system that relies on a historically-proven process to generate solid returns on winning trades and avoid large losses on losing trades. We’re definitely the tortoise, not the hare.
Trend-following systems don’t try to guess what the next move in the markets might be. Instead, we measure the markets each week and use our algorithms to determine the current trend and the exit strategy for the current trades.
Every trade has a pre-determined exit strategy. This is based on the normal volatility of the underlying ticker. Each stock has its own unique volatility. And volatility is dynamic. It’s constantly changing. Each week, we look at the previous 52 weeks of price movement to come up with its normal weekly volatility. This is called the “Expected Move”. The Expected Move equals one week of the normal volatility of the stock or ETF being measured. Every week, the exit strategy for each ticker is updated.
The biggest reason for the success of trend-trading is the discipline that is part of the investment process. The system forces investors to take small losses when the exit strategy is hit. Even though we’ve seen more winning trades than losing trades, it’s not uncommon to have several losing trades in a row. Market reversals and whipsaws are difficult conditions for trend-traders.
Though there’s never any guarantee of success in market trading, a study of the history of the markets shows that they tend to trade in trends over time that are measurable and quantifiable. This is definitely preferable to guessing or investing based on emotions.
The information published in this newsletter should not be used to make personal investment decisions. We are not licensed by any federal or state entity to give investment advice. We do not know your personal financial situation. Investments should be made only after consulting with your professional investment advisor and only after reviewing the prospectuses or financial statements of the companies in which you’re considering investing.