Under Review: Breaking Down My Trading Systems

Football Referee

trading systemsI’ve been doing weekend updates about different systems that I am following since the middle of July. Over the course of that time, there have been a number of different systems that I have tried. This process has been an interesting journey that has allowed me to experiment with different types of systems and develop an idea about what would work for me over the long run.

One of the key things that I have discovered about myself is that I really don’t have time right now to do regular homework. Business is booming at my day job, my side business is also doing very well, and I’m also renovating a 100 year old house and trying to be a half-decent husband. This is one of the major reasons that I wasn’t very good at CANSLIM trading. I just didn’t have the time to do the nightly research.

While I would love to have more time to devote to trading one day, it just isn’t in the cards right now. That is why I am so strongly drawn to Nick Radge’s Weekend Trend Trader system and Mebane Faber’s Ivy Portfolio. Both are systematic alternatives that require very little active management on my part. For that reason, I have been tracking the progress of paper trading two version of each of those systems.

Here is how things have gone so far:

Weekend Trend Trader: IBD 50 Portfolio

This strategy hasn’t gotten off to the roaring start I was hoping for. After about one month of trading, it is down 4.38% overall. The one bright spot is that almost half of that loss is a result of commission costs. Nick Radge pointed out to me in our podcast episode that commission drag was the biggest enemy of a small account. So far, he has been absolutely correct.

I am optimistic that this strategy will prove profitable, even with these significant commissions. It simply took a big hit at the beginning by having to open up all of the positions at the same time. Moving forward, there should be a lot less transactions.

Here is what the portfolio looked like as it closed out the week:

wtt-ibd-121413

 

As you can see, the biggest drain on the portfolio has been OPEN, which was down 12.65% from where I purchased it. It also crossed below 60% of its 20 week high on Friday, so I already have an order in to sell the position at Monday’s opening price.

In order to replace OPEN in the portfolio, I sorted the portential stocks according to the Weekend Trend Trader strategy. That list included QIWI, WYNN, LVS, BIDU, URI, and MA. Since I already own QIWI, I put in an order to buy WYNN on Monday morning.

Weekend Trend Trader: S&P Porfolio

This system is exactly the same as the previous system, but it uses the S&P 500 and S&P 400 Midcap stocks as a universe. This portfolio has been performing slightly better over the past few weeks, but took a pretty significant hit this week. It is currently down 4.11% overall. Again, almost half of that loss is commission costs, which I hope will go down now that the portfolio has been established.

Here is how the S&P Portfolio looked at the end of the week:

sp-121413

 

The biggest losers in this portfolio have been FSLR and SUNE. FSLR had been flirting with breaking below 60% of its 20-week high all week long, and it finally did that on Friday. I have already placed the order to sell that position at Monday’s open.

In order to replace FSLR, I put together another list of buyable stocks. That list included MU, YHOO, AAP, CAH, and NLSN. Since MU is already held in this portfolio, the next option is YHOO. I placed an order to buy a position on Monday morning.

The Ivy Ten Portfolio

The thing about the Ivy Portfolio is that it rotates all of its capital into the areas that have been performing best over the past 3, 6, and 12 months. Obviously, US equities are going to be at the top of that list. Therefore, the strategy has me fully invested in ETFs that represent US stocks. That means I am going to take a big hit if they struggle, which is exactly what happened the past few weeks.

Here is what that portfolio looks like:

ivy10-121413

 

The overall return of the portfolio is currently sitting at -2.53%. This is probably the result of the risk of starting the strategy at the wrong time. Had I started trading this strategy earlier in the year, I would be sitting on sizable gains from these same markets that are suffering right now.

If this is going to be a top in the US equities markets, then the strategy should be able to rotate itself into other asset classes over the next few months. Regardless of what happens, I need to stick to the system to see if it will indeed protect itself.

The Ivy 20 Portfolio

The Ivy 20 strategy breaks each of the Ivy 10 ETFs down into two different components. By having more specialized ETFs to choose from, this strategy will be able to drill down and capture the most meaningful parts of major trends. It will also leave me more exposed to getting smacked on turnarounds in those trends. This strategy should produce higher overall returns, with higher volatility than the Ivy 10 Portfolio.

Much like the Ivy 10 Portfolio, the Ivy 20 Portfolio is fully invested in the US equities markets right now. This has resulted in a 2.56% loss so far this month. Here is what the portfolio looks like:

ivy20-121413

 

One interesting thing that stands out to me is that, after adjusting for the commission costs of the Weekend Trend Trader portfolios, all four portfolios are in the same general area of returns. That is because they are all focused mostly on US mid-cap growth stocks. It will be interesting to see what happens moving forward and how these strategies differentiate themselves.

I have also noticed some interesting things with myself when trading these strategies. This is the first time that I have been able to trade individual stocks without being emotionally attached to them. Any losses that are posted are considered “part of the system” instead of them being the result of my failed analysis. Taking that burden off of my shoulders has been incredibly helpful to my psychology.

Long-term, I am probably going to make some adjustments to these systems before putting any real money on the line. I think that the Ivy strategies would be safer if they had some sort of stop loss built into each month.

I also think that the Weekend Trend Trader strategies could be quicker to cut losses. I am thinking that adding a set 10% stop to every new position in addition to the current trailing stop would help protect against some of the big losses that have been booked already.