Creating My Trade Strategy: My Universe (6 ETF's To Start)

[Daddybyday]

Hello, All!

I've posted in another thread about my project to come up with (or find) a medium-term trading strategy (https://www.trade2win.com/threads/s...erm-etf-trading-strategy.234833/#post-3092377) . The first question that I asked myself is "What do I want to trade?" After much thought, I've settled on 6 ETF's that will be my trading universe, at least for now. I'm going to discuss my reasons for that choice, and ask that if I'm being really silly, or if my reasoning is fallacious, y'all may discuss it with me. I'll split this up into a couple of replies, as I know that when I think I get long-winded! I'll post my actual universe in this post, then do a reply where I address why I chose ETF's as my instrument in general, and then another reply as to why I chose these specific ETF's.

So, here is my starting trading universe:

1) IVV (iShares S&P 500 Index)
2) ONEQ (Fidelity NASDAQ Index)
3) IUSB (iShares Domestic Bonds)
4) IEMG (iShares Emerging Markets Index)
5) FREL (Fidelity REIT Index)
6) IAU (iShares Gold Trust)

I'll close this and reply, and in that, WHY I CHOSE TO TRADE ETF's AT THIS TIME

 

[Daddybyday]

Here is part 2 of this post: Why I chose to Trade ETF's (As opposed to stocks, Forex, Futures, Options, Etc)

I put a lot of thought into that. At this point in time, I'm becoming more conservative. There are a few things that I like about the ETF choice:

1) The index ETF's seem because of the size, to be more stable. Because they are tracking, in this case, an index, it seems like patterns should be easier to spot, and less sensitive to random occurrences than an individual stock would be (e.g., GE fell through the floor when it cut the dividend, but the index was not affected as strongly). The trade-off, of course, is that this limits my upside potential, but think it's a good trade off.

2) These ETF's are hugely liquid, so I don't need to worry about being unable to enter/exit when I want to.

3) Because I trade on Fidelity, these ETF's trade commission-free. Because I'm starting small (I'm only allocating a $2000 trading budget to start, so not paying a commission on entry and exit will be helpful). There is a short-term trading cost, which is one of the reasons that I'm looking at medium to longer term setups.

As I move further into my journey, I may expand my horizons.

That is about it for this part of the post. A appreciate any thoughts that you may have.

Next reply will by, "Why These 6 ETFs"


Thanks!

Tom

 

[Daddybyday]

And here is part 3: Why These 6 ETF's

Again, the list:

IVV; ONEQ; IUSB; IEMG; FREL; and IAU.

I mainly chose these because they are largely uncorrelated, representing US Stocks, Emerging Market Stocks, Bonds, Real Estate, and Hard Assets.

We are in a monumental bull market right now, but I don't expect it to last. Because I'm trading in a retirement account, I"m not planning on any short-side trading (I don't think I even can). So my hope is that when this stock bubble bursts, I'll still be able to find some good long-side trading opportunities in the Real Estate, Bond and Hard Assets arena. I limited my selection to 6 because I want to limit my time, at least starting out. When I become more efficient in my decision process, I'll probably branch out.

As always, I appreciate, and look forward to any comments you may have to offer!

Thanks!

Tom

 

[0007]

Sounds like a very well thought out and sensible strategy – thank you for a most interesting insight. I trade on sort of similar lines with the S&P 500 – short to low medium term (nought to 4 weeks usually). One of the things that I have found to work very well (in a bull market) is trading stocks with good, dependable momentum and I trade those that have the best quality in that department. So although I may have only a small number of trades at any given time (like you've outlined) they are in my mathematical estimation the best contenders. I presume you would apply this sort of thinking to your ETF's also. Once you've got the mathematical side of things nailed down and you know what your probability is ( it must of course at least be positive – and you want the ones with the highest values) you just need to take the trade and watch it until it falters and then close. Very lightweight routine which doesn't overtax my limited brainpower.

The best exponent of this sort of thinking that I've come across is Andreas Clenow. Well worth a read whatever sort of trader you are. He emphasises simplicity and not to get involved with endless tweaking of minutiae – just get the basics right and the trade more or less looks after itself.

 

[Daddybyday]

Sounds like a very well thought out and sensible strategy – thank you for a most interesting insight. I trade on sort of similar lines with the S&P 500 – short to low medium term (nought to 4 weeks usually). One of the things that I have found to work very well (in a bull market) is trading stocks with good, dependable momentum and I trade those that have the best quality in that department. So although I may have only a small number of trades at any given time (like you've outlined) they are in my mathematical estimation the best contenders. I presume you would apply this sort of thinking to your ETF's also. Once you've got the mathematical side of things nailed down and you know what your probability is ( it must of course at least be positive – and you want the ones with the highest values) you just need to take the trade and watch it until it falters and then close. Very lightweight routine which doesn't overtax my limited brainpower.

The best exponent of this sort of thinking that I've come across is Andreas Clenow. Well worth a read whatever sort of trader you are. He emphasises simplicity and not to get involved with endless tweaking of minutiae – just get the basics right and the trade more or less looks after itself.
View attachment 261081

Thank you so much for your reply, 0007! And for your affirmation of my thought process!

I'll confess that I understood about 50% of what you said in your post. I still haven't worked out how I determine when when stocks (or in my case, my ETFs) have "good, dependable momentum," and hoave no idea of how you figure out the probailities, and what the math is. I'm adding Clenow's book to my Amazon wish-list though, and will read more!

Thanks!

 

[0007]

Thank you so much for your reply, 0007! And for your affirmation of my thought process!

I'll confess that I understood about 50% of what you said in your post. I still haven't worked out how I determine when when stocks (or in my case, my ETFs) have "good, dependable momentum," and hoave no idea of how you figure out the probailities, and what the math is. I'm adding Clenow's book to my Amazon wish-list though, and will read more!

Thanks!

PM me for some useful info!

 

[Daddybyday]

PM me for some useful info!

How do I do that? I'm new here ;-).

 

[malaguti]

Daddybyday, hope you don't mind me pitching in..
I've read the way of the turtles, and also think its a great book. he does go into the detail of the strategies and as 0007 states, its down to the individual to follow through on the strategy. and yet they all had the exact same strategy...remarkable

HOWEVER, the donchian breakout (the 55day high) isn't that great a strategy. Its profitable, but not mindblowing
I've backtested this for you, on your symbols going back for the last 20 years
its return over the years has been a little under 2% (per annum) and a success rate of under 50%
50% for a trend following system isn't too bad, but there are much much better. and they don't have to be complicated

If i could recommend another book for your list by Stan Weinstein, secrets for profiting in bull or bear markets. its quite simple, and on your symbol list, would be far more successful than the turtles
you can get an idea of the strategy from this thread below

https://www.trade2win.com/threads/stan-weinsteins-stage-analysis.134944/

of anything i've tried over the years, this has by far been the best i've come across.

one other thing, as Tomorton mentioned, scaling into a position and adding to a winning hand is the differentiating factor in the success of the strategy, but if you combine that with a strategy that has a higher probability of success, it can go that much further. do listen to Tom's advice. i've tried his first approach, adding to the position on the next signal, which i prefer over the others and the only thing i'd disagree with, it DOES significantly add to generated profits. exponentially

and lastly your allocation of funds is important across your symbols, two of your symbols are so highly correlated you don't need both.IVV and ONEQ and if anything you are increasing your risk with both.

let me know if you'd like more information or need a hand getting started. and good luck!

 

[Daddybyday]

Hello, Malaguti,

Thank you again for your response. As a young Padawan, I appreciate the Jedi's chiming in! (I was going to say, as "Grasshopper," but does anyone even remember Kung Fu?".

I actually considered IVV and ONEQ--I added ONEQ last minute thinking that the increased volatility of the QQQ may add something. I may end up dropping it.

Stealing a minute between Church and a Family afternoon, so I'll look at the thread on Weinstein later on this evening.

I will say that, based on the other threads, I was thinking about way in my investing past, 2 books that I read: Stock Market Strategem by Braden Glett, and How to Make Money in Stocks by O''Neil. Both advocate pretty convincingly for a scaled in approach, and I've been doing the math in some "make believe" scenarios, and here is what I've come up with:

1) Scaling in or Pyramiding reduces the total risk on a trade.
2) Scaling in also reduces the total reward (both compared to purchasing a full position up front).

In my informal, theoretical modeling (very informal), it does seem like the descreased risk outweighs the decreased rewards, so I think I'm going to try to incorporate that.

The second thought that I had is that while I like using indicator-based strategies (after all it's easier, when does line 1 cross line 2?), I need to not be lazy and study again the basics of charts and price action--trend lines, support/resistance, candlestick patterns, chart patterns, etc. My gut says that that is where I need to start, and if I'm going to use indicators, use them only to supplement what the price action is telling me. That is my gut. I was never very good at that, but I think I need to spend more time there.

Lunch time, gotta go ;-)

Thanks!

Tom

 

[Daddybyday]

and lastly your allocation of funds is important across your symbols, two of your symbols are so highly correlated you don't need both.IVV and ONEQ and if anything you are increasing your risk with both.

Been thinking about this (my curse, I'm always thinking), and I think I'll drop either IVV or ONEQ (probably ONEQ). Can you think of any uncorrelated assets I need to add that will make the project more robust? Perhaps adding European or Asian markets, International Real Estate, or do you think those 5 about do it? Always seeking suggestions!

Thanks!

Tom

 

[malaguti]

Been thinking about this (my curse, I'm always thinking), and I think I'll drop either IVV or ONEQ (probably ONEQ). Can you think of any uncorrelated assets I need to add that will make the project more robust? Perhaps adding European or Asian markets, International Real Estate, or do you think those 5 about do it? Always seeking suggestions!

Thanks!

Tom

In a good portfolio there is always the conservative short and medium term treasury bonds, that's probably not a bad mix. And always an emerging market
I'll dig them out for you

 

[malaguti]

IEI and IEF are the US treasury 3-7 year and 7-10 year treasury bond ETFs and the emerging markets is EMB

 

[Daddybyday]

I have the emerging markets in there, IEMB. Would IEI and IEF add anything above the IUSB, which is a diversified bond ETF?