DTAYS Quantitative Growth Fund

quantitative growth fundThese are the original rules and logic behind the DTAYS Quantitative Growth Fund. I have made a number of changes to the rules that are expressed in italics. The progress of the fund can be monitored through my Weekly QG Fund Updates.

After deciding that I wanted to pursue a quantitative approach to trading, I went through an interesting development process. I spent about six months learning about all of the different types of trading systems and how they worked. Then, I spent another six months simulating the trading process of a number of different strategies.

As my free trial period with TradeStation was running out, I began looking at different platform options. I really liked the look of TD Ameritrade’s thinkorswim platform, so I opened an account and began playing around with it. One interesting aspect of thinkorswim is that it came with a $100,000 demo account. I have used plenty of demo accounts with different websites in the past, but I have never had one built right into a platform the way this was.

The Real Money Proposition

Staring at the hypothetical $100,000 sitting in this account got me thinking about how I would approach trading it if that was real money that I had raised from friends and family. What strategy would I pursue if I actually had legit cash on the line?

Having real money on the line changes the thinking behind trading. It’s one thing for me to practice trading four different portfolios at the same time to see which ones perform better. It is a whole other ballgame to pick one strategy and actually be accountable for the returns.

Obviously, there is only so much that I can do to make this money feel real. That is where you come in. Hold me to this. What if you chipped in five or ten grand to back my new fund? What questions would you be asking? What suggestions would you make? Should I listen to any suggestions at all?

The General Strategy

As I ventured into different type of quantitative trading, I was fascinated by mean reversion strategies. I am also very curious about a few different options strategies. However, my core is trend following. I’ve read all of Covel‘s books, watched his movie, and listened to all of the brilliant people he has interviewed on his podcast.

With that background, trend following is naturally where I gravitate towards when forced to choose a general strategy. My strategy will look to ride major long-term trends by cutting losses short and letting winners run.

Which Markets?

The next question is which markets will the strategy be trading? Again here, I went back to my roots. I spent years studying William O’Neil’s CANSLIM strategy by reading his book and Investor’s Business Daily.

My struggles with actually trading the CANSLIM strategy all stemmed from my own mental issues with the discretionary aspect of the strategy. I have always had a strong belief that IBD does an excellent job of screening the very best quality growth stocks. For that reason, the obvious choice for me was to trade a universe of stocks based on each weekend’s IBD 50.

I know from my experience with the Weekend Trend Trader strategy that using the IBD 50 as a stock universe will provide me with plenty of high-quality options for any trend following strategy.

Entry Signals

Given a big pile of cash that I HAD to trade, I would apply some sort of trend following strategy to a universe of IBD 50 stocks. The next step was to identify how I would go about entering those positions.

I’ve had some early success trading Nick Radge’s Weekend Trend Trader strategy. One of the things I really like about Nick’s strategy is that it takes a longer-term approach by using weekly signals. I also like that it can be boiled down to a basic breakout system.

For that reason, my strategy will implement the same entry approach using 20-week breakouts and the Rate of Change indicator.

(Update 3/31/14: Based on the backtesting research that Cesar Alvarez did for me, I have since added an additional filter that screens for Historical Volatility below .40.)

Exiting Positions

Exiting positions will be a bit of a hybrid approach.

The number one rule in trading is: Don’t Lose Money. In order to make sure that the strategy keeps losses as small as possible, my first exit strategy will be an initial stop at 8% below the entry price. IBD recommends that CANSLIM traders use an initial stop of 7-8%, and many famous traders recommend 10%. I was originally going to use 10% as my initial stop, but anything that drops 8% from my purchase price is probably not going to turn around anyway.

That takes care of losing positions, now what about the winners? For this one I went with the average true range (ATR) Trailing Stop that my friend Larry Tentarelli recommended I start using a few years ago. My plan is to use three times the ATR as a trailing stop to capture any profits.

(Update 3/31/14: Based on the backtesting research that Cesar Alvarez did for me, I have adjusted the ATR-based trailing stop to a multiple of 5, and increased the initial stop to 12%.)

Trend Filter

I write about a lot of strategies for One Step Removed. In those posts, I tend to sound like a broken record because I am always suggesting the implementation of a trend filter. I would be a pretty big hypocrite if I didn’t use one in my own strategy.

In order to make sure that I am not taking new long positions when the general market is in a downtrend, I will only be looking for new entries when the SPY is above its 100-day simple moving average (SMA).

Position Sizing

When it comes to position sizing, I will once again be going back to Nick’s Weekend Trend Trader strategy. My plan will be to build my system up to a maximum of 20 positions that each represent 5% of total capital.

(Update 3/31/14: Based on the research that Cesar Alvarez provided me, I have reduced the total number of positions to 10. This will cut the total number of annual traded to less than half, greatly reducing commission drag.)

Let’s Name This Thing!

Now that I’ve laid down the basics for my new strategy, what am I going to call it? If this were actually a fund I was putting together, I would want a catchy name to attract investors, right?

I’ve always been a simple guy when it comes to naming things, so for this fund I just wanted to describe the general goal. The fund is taking a quantitative approach to trading growth stocks, so the DTAYS Quantitative Growth Fund is as good a name as any.

And with that, the DTAYS Quantitative Growth Fund was born…..