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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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