Low Risk Trading
Strategy
Short Description
This strategy is similar to the Basic Trading
Strategy, but we buy two stocks from the list with maximum price drop (in %) only if their
prices dropped more than 5% during day #1. (Bullish Level in the list of
Potentially
Bullish Stocks).
More details
To reduce risk one should be very selective choosing stocks to buy. The simplest idea is
to buy stocks with some level of price drop during day #1. In the Basic Trading Strategy
one buys stocks with maximum price decline during the day #1. Sometimes the maximum price
drop is not large. Usually this is an indication of strong market growth during day #1.
You can avoid buying stocks if they do not decline significantly. For the Low Risk
Trading Strategies, you should consider only stocks with a price decline of more than 5%
(Low Risk Strategy-1) or 10% (Low Risk Strategy-2). This method can be illustrated by the following scheme.
Before market closing on the day
following the analysis check, the stocks in the potentially bullish stock list. |
Find two stocks with maximum price (in
%) decline during day #1, i.e., the ratio CLO1/CLO0 should be minimal. |
If the price decline of both
stocks is more than 5 - 10%, buy these stocks. Percentage of decline we will call the
level of selection. |
Hold these stocks for two days. |
Sell the stocks at the market opening
on day #4. |
Let us show some statistical data for the Low
Risk Trading Strategies. The computer analysis was performed during the period from
January, 1996 to July, 1999.
Parameter |
Basic
Trading Strategy |
Low
Risk Trading Strategy-1 |
Low
Risk Trading Strategy-2 |
# of days
when 2 stocks for trading have been found |
873 |
419 |
116 |
Average 3
Day Return |
+3.4% |
+4.8% |
+7.1% |
Standard
deviation |
8.3 |
9.6 |
10.5 |
Risk/Return |
2.4 |
2.0 |
1.5 |
Probability
of positive returns |
69% |
73% |
78% |
Probability
of returns < -20% |
1.4% |
1.8% |
1.3% |
Probability
of returns > +20% |
3.8% |
6.3% |
9.1% |
Probability
of returns < -10% |
4.0% |
4.5% |
3.9% |
Probability
of returns > +10% |
15.2% |
21.0% |
28.4% |
Portfolio
Growth
Jan 96- Jul 99 |
17400% |
5500% |
590% |
You can see how large the
average return was for the Low Risk Strategies. The risk to return ratios are also much
better for these strategies. But the number of trades for these strategies were much
smaller than for the first one. For example, trading opportunities open approximately once
every two weeks for the Trading Strategy-2. In conclusion: portfolio growth for the Low
Risk Trading Strategies is less than for the Basic Trading Strategy. This is the payment
for smaller risk.
 Our
statistical analysis presented on the main page has been performed for
the Low Risk Strategy-1, i.e. for 5% level. The Figure shows histograms
of quarterly for Low Risk Strategy and for NASDAQ-100 and Dow Jones.
Brokerage commissions and bid-ask spread was supposed to be equal 5%.
The period from January 1996 to September 2002 has been considered.
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