This post expands on my mechanical rules for the investing system described in the Simulation 1 thread. So far, Sim 1 has delivered a return of 9.8% since our September 4 start date (seven weeks ago), compared to 5.1% for the S&P 500.
This system is based on observations about “superperformance” stocks by market wizards like William O’Neill (founder of IBD), Stan Weinstein, Jesse Livermore, Paul Tudor Jones and Mark Minervini (who won the US Investing Championship multiple times). Here are the basic principles I’m using.
Risk Management
- Every new purchase is made with a 10% stop loss
- The stop price keeps getting raised to 10% below the current price after a gain of 20%. (Note that a gain of 20% is 2R - that is, 2 times our risk of 10%.)
- If we do not have a gain of at least 10% on the position, we will generally not hold the stock through the earnings announcement date
Buy rules
- Stock must be in a Stage 2 uptrend
- Price should be above the 50dma (but ideally not more than 15% above it)
- 50dma should be above an upward sloping 200dma line
- Chart shows strong 6-month price momentum
- Price chart during past week should have leveled off with declining volume OR broken above resistance line with big increase in volume
- Sales growth or EPS growth > 25% YoY
- Price/sales ratio < 20
Sell rules
- Stock hits our stop price
- Stock declines below the 50dma
This is not financial advice. Consider your own risk tolerance and situation in life before embarking on a system like this. My personal situation is that I retired early some years ago, am mostly in index funds, and use this strategy for the aggressive growth portion of my liquid assets.