Backtesting Charts, 5-Best vs. 5-Worst

Is Buying Important?

The irony of trading is that the most important aspects of trading are exciting, while the least important are in fact the most boring. If I were to make a list in order of importance of what I’ve observed through research and personal experience, it would be the following:

  1. Psychology
  2. Risk Management
  3. Selling
  4. Buying

Look at most books, twitter feeds, internet articles, and blogs, and you will definitely see an overemphasis on what to buy. You’re definitely more likely to see a tweet like this:

“Bought more $AAPL as it dipped to the 50-day SMA. I’m going to be rich!😎👾”

Rather than:

“I bought my $AAPL with share size set to AccountSize*1%/(price – 50-day). I found it using a script to avoid confirmation bias.”

Everyone does, I do it too, I usually post my buys and sells. I’m not one to give tweets on psychology and risk management because there are so many awesome traders out there already doing it, that it’s just easier to retweet their wisdom! (Check out @LMT978, @SJosephBurns, @BreakingOutBad, @markminervini, @MichaelGLamothe, @AsennaWealth, @thechartist in particular). Maybe one day I’ll jump on that bandwagon, but for now I’m just trying to prove to myself I can trade consistently, first. They have way more followers, so maybe there is a correlation, there? 🤔

I’ve also mentioned in a past blog how Van Tharp described a random buying system essentially made a small profit using fixed rules, position sizing and risk management.

So with all the focus on entries, I thought showing some charts from my backtests would be useful to reinforce this. I chose the five best performers and five worst performers and here they are randomized in the slideshow below. Try not to look at the results at the top left at first, and then again looking at the results. The breakout signal is the last bar on the chart.

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Did you manage to figure out which ones were the profitable stocks? It’s not easy right? There are methods to filter stocks that give a slight better edge (lately I’ve been using beta, but relative strength has worked well, green vs red candle count, etc.), but nothing dramatically changes your returns more than trading small, normalizing volatility with position sizing, and sticking to well researched sell rules that don’t exit too soon, but don’t give up too much gains, either.

Until next time!

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