Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies by Andreas F. Clenow

Author:Andreas F. Clenow [Clenow, Andreas F.]
Language: eng
Format: epub
Tags: Finance, Trading, Technical Analysis, Hedge Funds, Markets, Mutual Funds, Trading Systems
ISBN: 9781310297243
Publisher: Equilateral Publishing
Published: 2015-06-11T16:00:00+00:00

Figure 10 22 Trading Rules Flow Chart

Trading the Strategy

Perhaps the whole momentum strategy seems a bit theoretical at this point. It might help if we take a look at the practical side and see how you would actually implement it. We’ll also review some charts to see where stocks would have been bought and sold.

The Initial Portfolio

The day you launch your strategy, you jump right into the deep end of the pool. No gradual buying. Given that the market regime is positive, that is if the index is trading above its 200 day moving average, we just buy stocks until we’re out of cash.

Obviously the first task here is to make sure that the S&P 500 is trading above the moving average. This part is easy. Any charting software can do that for you, and you could even do it in Excel if you want by just comparing the average of the last 200 index prices to the current one. If the index is below the moving average, we don’t buy a thing. Just sit tight and wait for it to come back up into positive territory.

Now you need to calculate the relevant analytics mentioned in previous chapters and make a neat little ranking table. Doing this manually for one stock is easy enough, but we need it for hundreds of stocks. Some readers may think this is a piece of cake to get done while others have no idea where to start.

What you want to come up with is something like Table 11-9. Naturally the actual data in this table is not up to date by the time you read this. This table forms the core of the entire strategy. It’s a very important table, so let’s go over the crucial columns.

The slope column is probably the most important one. That’s what the table is sorted on and that’s what governs the priority of our purchases. The slope column shows the volatility adjusted slope, as explained in chapter . Briefly, this number is simply a measurement of the momentum a stock is showing, adjusted for volatility. The higher the number, the better the risk adjusted performance has been. We want to buy a portfolio of as high numbers as possible.

Even if a stock has a very high rank, it could still be disqualified. There are two more columns we need to check before knowing if we’re allowed to buy a stock or not. The Trend column tells you whether or not the stock is above its 100 day moving average. If it’s not, we’re not buying it. It’s unusual for a stock to have a very high ranking and still be below this average, but it can happen. This is a bit of a failsafe to avoid some weird situations.

Then there’s the maximum gap. We’re not looking for stocks that suddenly made a 40% jump on a takeover rumor. We’re looking for orderly bull markets, stocks moving up in a controlled fashion. Some gaps have to be accepted but

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