Ok, so following on from my earlier post, I will post a diary of my execution of a strategy I have just finished developing, following the same process I have used to develop a portfolio of FX strategies which I have been trading for some time now. The backtesting is a bit more extensive here - I have used 20 years of data here to validate the strategy whereas I have only been using 6-8 years of data to develop my FX strategies.
I will apply this strategy only to ASX300 stocks - I prefer to stay away from the small caps, plus I also am looking to ensure I have sufficient liquidity to enter and exit positions when I want to (not difficult in the beginning since my positions are small, but I expect as the strategy unfolds and the equity balance grows, due to compounding the position sizes will grow over time).
The strategy will be a weekly price action strategies (I will constrain all the equities strategies I develop to weekly price action, for ease of execution).
This strategy is based on weekly open gaps, but I will include 3 specific types:
Weekly gap up opens Which I call type v6):
Weekly gap down opens (which I call type v5):
And finally a multi-gap structure (which I call type v2) which occurs if there are at least 2 weeky gap opens (doesn't matter whether up or down) within a 5 week period, and the entry & stoploss is based on whether the most recent gap is up or down according to above. Also in this case, I will accept an entry in weeks 1-5 as opposed to just 2-5, after the gap open bar.
Each of the above has some constraints placed upon them, not the same for each type, such as a minimum average weekly volume required, minimum price level, and certain other details of the bars themselves (bar range, close). There is only one indicator used - the RSI - which is used only for one of the three types, otherwise its all pure price action based.
Money management is based on a starting equity balance of $50,000:
- Position sizing will be a fixed % of the current closed position balance (and therefore invoke compounding)
- For gap types v5 & v6, the risk per trade will start at 0.5% of closed position balance
- For gap type v2, the risk per trade will start at 1.0% of closed position balance (type v2 gives significantly better results than types v5 & v6)
- After 6 months, the above percentages will double, i.e. I will apply the above reduced risk % for an introductory 6 months
- The position size is therefore calculated as the above risk % in $ (for example 1% x $50,000 = $500) from which I deduct closed position brokerage ($22 total) and the remainder is divided by the difference between the entry price and stoploss price to obtain the position size
Trade management is as follows. Unless the stoploss price is hit, or there is an intervening ex-div date, the positions will be closed at fixed periods from the week of entry:- Type v2 gaps will be closed at the close of the 2nd Friday from the week of entry
- Type v5 gap trades will be closed at the close of the 3rd Friday from the week of entry
- Type v6 gap trades will be closed at the close of the 13th Friday from the week of entry
- If there is an intervening ex-div date due, the position will be closed at the close of the day before going ex-div
I have only just started this strategy this week, and so far I have the following entries:
Based on my backtesting history over 20 years, I only expect 2-3 entries per week (about 100-150 per year) so I will provide a weekly update include the watchlist for the upcoming week, and positon/account summary, but any day when an entry is triggered I will post the entry so that it is not a hindsight entry.
Let's see how we go...
Cheers, Sharks
PS: Don't expect to see me achieving a gazillion % return on this strategy, based on my backtesting I am hoping for a long term average of around 40-50% return (uncompounded)
