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I have worked on a simple strategy that looks for the stock with the largest cap, buys it, keeps it until it has a 2% increase, and then repeats the process again.

This is a simple strategy but applying it to 20 stocks with the largest volume from 2004 to 2023 has an annual rate of return of 27%. Here are all the transactions https://sites.google.com/view/simpletrading2023/home

Can we conclude from this backtest that the strategy is reliable?

N N
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  • Did you pick the largest cap companies at that time and run your strategy forward or pick the largest cap companies today and go back in time? – D Stanley Nov 22 '23 at 13:55
  • I feel like you made a mistake in your backtest. Looking at the largest companies from 2004 I don't see any one company that obviously made an annual 27% return, let alone investing in all 20. – D Stanley Nov 22 '23 at 13:57
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    @DStanley "until it has a 2% increase" Not one stock. The wording is clearly off, largest cap perhaps is supposed to be highest volume, unclear. – Hart CO Nov 22 '23 at 16:10
  • I'm not sure how this strategy can produce such a high return. It essentially requires each stock to increase 2% in about a month on average. – Barmar Nov 22 '23 at 21:54
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    @DStanley This is a good point. I limit my test to the current S&P 500 companies but I use the historical volume data. So at each date, I select the stock with the highest volume on that date and buy it the next day. I will sell it once it has a 2% increase. – N N Nov 23 '23 at 00:14
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    @Barmar I have put all the transactions here https://sites.google.com/view/simpletrading2023/home?authuser=0 if you are interested you can check it out. – N N Nov 23 '23 at 01:04
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    @DStanley I have put all the transactions here https://sites.google.com/view/simpletrading2023/home?authuser=0 if you are interested you can check it out. – N N Nov 23 '23 at 01:04
  • Did you factor in expenses? If you had done this 20 years ago there would be charges for every trade. Don't forget taxes if that applies. Did you calculate in the amount you missed by exiting the market frequently? – mhoran_psprep Nov 23 '23 at 04:55
  • @mhoran_psprep I tried to include taxes, so assuming 30% of profit is left for taxes, the ROT will be 18%. What do you mean by exiting the market frequently? – N N Nov 23 '23 at 05:26

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In a comment I asked if you included taxes, charges for each trade, and the amount you missed by frequently exiting the market. You asked for clarification regarding exiting the market.

In the data sheet you showed that you went long stretches where you sold all your shares a company because it went up 2%, and then the next day reinvested all your money back into the same company.

Sometimes doing that was a good thing:

  • Purchased 2830.00 of AAPL at price $0.51 on 2004-06-24. Total Invested: $1456.20. Remaining Budget: 0.50. Total Budget: 1456.71
  • Sold 2830.00 of AAPL at price $0.52 on 2004-06-28. Total Invested: $0.00. Remaining Budget: $1485.83. Total Budget: $1485.83
  • Purchased 3017.00 of AAPL at price $0.49 on 2004-06-29. Total Invested: $1485.72. Remaining Budget: 0.12. Total Budget: 1485.83
  • Sold 3017.00 of AAPL at price $0.50 on 2004-06-29. Total Invested: $0.00. Remaining Budget: $1515.55. Total Budget: $1515.55
  • Purchased 3031.00 of AAPL at price $0.50 on 2004-06-30. Total Invested: $1515.42. Remaining Budget: 0.13. Total Budget: 1515.55
  • Sold 3031.00 of AAPL at price $0.51 on 2004-07-15. Total Invested: $0.00. Remaining Budget: $1545.86. Total Budget: $1545.86

You bought at $0.51, and several transactions later you sold at $0.51 but because you didn't own own the shares when the small drop occurred from $0.52 to $0.49 you made almost $90.00. That worked out for you.

Sometimes you missed a jump in price:

  • Purchased 2909.00 of AAPL at price $0.62 on 2004-10-07. Total Invested: $1810.88. Remaining Budget: 0.28. Total Budget: 1811.16
  • Sold 2909.00 of AAPL at price $0.63 on 2004-10-14. Total Invested: $0.00. Remaining Budget: $1847.38. Total Budget: $1847.38
  • Purchased 2680.00 of AAPL at price $0.69 on 2004-10-15. Total Invested: $1846.93. Remaining Budget: 0.46. Total Budget: 1847.38
  • Sold 2680.00 of AAPL at price $0.70 on 2004-10-18. Total Invested: $0.00. Remaining Budget: $1884.32. Total Budget: $1884.32
  • Purchased 2551.00 of AAPL at price $0.74 on 2004-10-19. Total Invested: $1884.16. Remaining Budget: 0.16. Total Budget: 1884.32
  • Sold 2551.00 of AAPL at price $0.75 on 2004-10-27. Total Invested: $0.00. Remaining Budget: $1922.00. Total Budget: $1922.00

You missed two jumps in this sequence of trades: $0.63 to $0.69 and again from $0.70 to $0.74. If you had simply bought at $0.62 and sold at $0.75 you would have made more money. Of course you don't know this before the fact.

Looking just at your first data sheet you bought and sold nothing but AAPL from:

  • Purchased 3040.00 of AAPL at price $0.33 on 2004-01-05. Total Invested: $999.90. Remaining Budget: 0.10. Total Budget: 1000.00

until:

  • Sold 2462.00 of AAPL at price $0.81 on 2004-10-29. Total Invested: $0.00. Remaining Budget: $1999.63. Total Budget: $1999.63

You essentially doubled your money. Good job. But....

If you had simply bought at $0.33 and sold at $0.81 you would have turned the $1000 into $2462. You would have made $460 more.

This reminds me of an earlier question:

Is it true that, "just ten trading days represent 63 per cent of the returns of the past 50 years"?

from my answer to that other question:

I did find that a similar phrase in an article on the motley fool website

Time in the market, versus time out of the market

J.P. Morgan Asset Management's 2019 Retirement Guide shows the impact that pulling out of the market has on a portfolio. Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. That's a significant difference for only 10 days over two decades!

The JP Morgan study can be found on their website. Page 41 of the report has the information.

The constant in and out of the market could mean you miss a significant chunk of the growth.

mhoran_psprep
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    A feature of any consistent investment strategy, either buy-and-hold, dollar-cost-averaging, or something like this, is that you avoid trying to time the market. Unless you have lots of information, the latter is mostly just guesswork and you're just as likely to miss those 10 days. – Barmar Nov 23 '23 at 16:32
  • Thanks for the detailed explanation. – N N Nov 23 '23 at 19:12