Over the past month, we have been showing TradeStops members the importance of investing in stock trades that have strong up-trending momentum. The basis for all of this research goes back to an article that was published over the summer.
This past August, TradeSmith wrote an editorial that shows the power of the Stock State Indicator Entry signals and Stop signals. In 37% Per Trade over 20 Years, he presented the following statistics that sum up 20 years of backtesting using 1300 different tickers. These tickers include stocks, indices, funds, and commodities. And the results are incredible.
The study had almost 7500 trades. And 52.7% of these were winning trades. Of course, that means that 47.3% were losing trades. The average winning trade was +84.3%, and the average losing trade was -16.4%. This means that the winning trades outperformed the losing trades by 5-1.
Some of our TradeStops members expressed concern that the winning stock trades were only slightly more than 50%. They wanted to know why this is a good number.
It’s difficult to blame their thinking. After all, we routinely see ads promoting 75% winners, 80% winners, and even some who advertise that they have 90%+ winning trades. 53% winning trades pales in comparison to these others.
But the purpose of investing is not just to have winning stock trades. The purpose of investing is to make money. Period. Let’s look at a simple example that shows the power of 53% winning trades.
In this example, we’re going to have one stock that makes money and one stock that loses money. This portfolio, with a 50% win rate, has a worse win rate than the 53% win rate that TradeStops achieved.
We’re going to use two fictional stocks, ABCD and WXYZ, that each have the same Volatility Quotient of 20%. We’re going to invest $100 in each stock. ABCD will have a gain of 5 VQ% and WXYZ will have a loss of 1 VQ%. This is the same win/loss ratio that we saw in the 20 years of backtesting.
Here are the results of the two trades.
The results are powerful.
These two trades, one a winning trade and one a losing trade, generated a profit of $80 or 40% of the total amount invested. It’s as if you would have made 40% profit on each trade.
Let’s look at these results from the perspective of the “smart money” investors. Institutions and hedge funds look at the TradeStops methodology as a “black box” system. This means that the SSI Entry signals and the SSI Stop signals are generated by a computer. There is no human intervention into the signals because everything is based on the series of algorithms developed by TradeSmith and his team.
This black box system makes managing your investments much easier. There is no guessing as to when you should buy or when you should sell. And it’s this type of black box technology that is taking over the investing world. You’re the beneficiary of the fact that TradeStops is on the leading edge of developing this technology.
That doesn’t mean that there is nothing for you to do. It’s still up to you to determine how much risk you’re willing to take. It’s up to you to determine the percentage of investments in stocks and bonds. And it’s up to you to make the decisions on which stocks to buy and sell in your portfolios.
Hopefully you now have a better understanding of why 53% winning trades is so important for your investment portfolios. It’s not the percentage of winning trades that makes a difference, it’s how much you can make on your winning trades in comparison to your losing trades.
Tom Meyer
Members, Services
