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Wednesday, June 20, 2018

TTP - Trading System

Mar 29, 2018

Trading System

Hi Ed,

I am from Taiwan and knew you from Market Wizards about 15 years ago. Read the FAQ for many years. I think I am half a fundamentalist / trend follower, and want to share my process with you.

Here is my version of Ed's trading rule:

1.Cut losses: I set price stop loss almost all the time. There is one exception: Sometimes I can find extremely cheap stocks (e.g. long term dividend yield over 10%), especially when the market collapsed. I don't set price stop loss for those stocks since the company itself can generate cash, but fundamental stop loss (like lose the ability to earn cash).

2.Ride winners: I use some skill such as turtle soup to pick short term top/bottom, and use breakout/simple moving average to catch the trend. Parameter doesn't matter. (No magic number, just large enough to catch the major trend)

3.Keep bets small: I use value-basis position sizing. I usually put 3-5% of asset into the sub-account and set 10% stop loss for each account. It means the risk of each position is 0.3-0.5%.

4.Follow the rules without question: I know in what situation my system works or not through history. I did some backtests many years ago. In recent years, I only read the paper online. There are so many professions did the back-test for us. Different time horizon, different area, different asset class, similar result. So I just follow what works in the long term.

5.Know when to break the rules: Statistically, buying cheap/strong stocks and selling expensive/weak stocks get positive return, so I select the stocks according to the researches. Sometimes I get invest ideas that do not meet the rules above, but if I think it is reasonable, I may still take positions. The only rule I will never break is "keep bets small". Have seen too many people wiped-out by a once-in-a-lifetime opportunity.

I can beat the benchmark (TAIEX. I trade Taiwan stocks mostly) with relatively low drawdown. I still feel sad when taking consecutive losses but it is acceptable since I don't take too much risk. The system I adopted suits me, so I sleep well at night.

I am satisfied with current situation. Thanks for all your insights for trading. It helps me a lot.

Best wishes,

Thank you for sharing your process and for explaining your trading method.

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