1Yr·

Hello everyone and a happy new year!

I'm currently thinking about how I can optimize my trading strategy or how I can start by creating a proper strategy.

My previous investments in my conservative retirement provision portfolio were traditionally based on ETFs (e.g. MSCI World) and in my "play money portfolio" I am currently more "spontaneously" driven. I want to change that now.

My specific question to you:

There is a stock market rule: "Back and forth empties your pockets".

I can of course follow this in my head and it sounds logical at first.

On the other hand, if I make 12 trades in a year, in which I sell directly after a 5% increase in the respective value, I would have an annual return of 60% (minus fees, etc.).

Of course, selecting the stocks for the 12 trades involves a certain amount of risk. The target profit of 5% is only an example calculation, but even at 4% you would still have an annual return of 48%. I think the chance of achieving such a return with a single stock that you hold for the whole year is rather less likely.

What do you think of the two investment approaches?

I look forward to a constructive discussion!

Best regards,

Alex

46 Comments

Jens@AI-Investor

1Yr

Happy New Year to you too.
At the end of the day, you're trying to time the market, which is much harder than you think.

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ag84@ag84

1Yr

@AI-Investor Thank you for your feedback - of course it is more time-consuming in any case. I'm just trying to answer the question for myself as to whether it might be a sensible alternative or supplement to bet on smaller price increases at high frequency rather than on a long-term and steady development with just a few trades.

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Epi@Epi

1Yr

@ag84 This is of course possible and is the bread and butter business of day traders.
The problem with this is that you are competing against these full professionals who are always 0.5s ahead of you with incredible AI supercomputers (via order book insight, for example) and who live from taking money out of the pockets of people like you.
As a small investor, you will necessarily lose out to these people. That's why most retail investors invest for the medium to long term. Day traders are not interested in this time span.

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ag84@ag84

1Yr

@Epi Yes, as a private individual with a full-time job, I don't see any chance of this on a daily basis either. Hence the idea of extending the investment period from 1 day to, for example, 1 month (or another time period).

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Epi@Epi

1Yr

@ag84 That would be one possibility. There are various interesting strategies on a monthly basis. I am also pursuing one myself with GTAA. I think it's exactly the right range for private investors. 👍

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ag84@ag84

1Yr

@Epi Thanks for the impulse. I didn't know GTAA yet. I'll take a closer look at it.

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Jonas 🕊️@TheAccountant89

1Yr

Point 1: you must not mix trading with long-term investing. These are two different approaches. One does not outweigh the other.

Point 2: too much subjunctive in your return expectations.

The "stock market rule of thumb" you mention refers to long-term strategies, which many unfortunately do not follow through with consistently, often do not deal with their investments intensively enough or "overthink" them too much and then throw a lot of things overboard again. But this has nothing at all to do with trading, as the holding period is inevitably shorter and "back and forth" can happen as a result.

The long-term strategy refers to "investing". The short-term strategy refers to "trading". Therefore, keep the terminology and strategies clear.

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ag84@ag84

1Yr

@TheAccountant89 Thanks for the feedback! You're right about the terminology, of course!

Yes, the expected return is of course just an extrapolation - but a situation like this happened to me twice in the last month - so I'm trying to reflect on whether it might make sense / be a strategy to focus on smaller price increases, but with a higher frequency?

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Jonas 🕊️@TheAccountant89

1Yr

@ag84 Perhaps you also need to gather your own experience here. But I suspect that this will not work out 1:1. Even if you achieve a 5% return in 9 out of 10 cases, it is quite possible that a single trade can ruin the entire return (even a stop loss does not protect you from everything). Don't get me wrong, you can also make a return with trading. But it's just not as easy as you might think.

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Kevin E.@KevinE

1Yr

What the others say. Besides: 5% increase and then into a new value, again 5% increase, etc. are clearly >60%, with 12 repetitions. Thanks to compound interest.

How realistic it is to beat 99.999% of all investors every single year is for you to decide.

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ag84@ag84

1Yr

@KevinC Yes, if you also reinvest the profit, it would of course be >60%. Whether it is actually 5% or 12 successful attempts remains to be seen. The example calculation was only intended to illustrate the principle / idea.

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TomTurboInvest@TomTurboInvest

1Yr

@ag84 as others have already commented plus...as I understand your post, you would invest "serially" with amount x, i.e. only invest in a new share when you have sold the old share with +5%... phew that's quite unlikely in terms of timing. I'm afraid that apart from a theoretically possible variant / thought experiment, there's not much left.

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ag84@ag84

1Yr

@TomTurboInvest Yes, that's exactly what I meant!
What I find quite interesting is that such an approach would give you a fairly precisely defined window for the return and holding period to be taken along - in other words, for a strategy, actually quite good framework points for the sell decision:
1. either the targeted return is reached (e.g. 5%)
2. or the targeted return is not achieved in the targeted period (e.g. 1 month)

Both cases would then be clear sell points. If the 5% is reached before the end of a month, there is still a chance to improve the annual performance or to compensate for poor performance.

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Kevin E.@KevinE

1Yr

@ag84 if you are sure that you will find at least 10 stocks within a year - one after the other - that will increase by at least 5% (actually more, since you have to compensate for the losses of the unsuccessful attempts) -> go for it!

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ag84@ag84

1Yr

@KevinC The 5% was just an example - but even at 10x 3% you would still end up with a respectable 30% at the end of the year.

I find the discussion here really exciting! But I have to honestly admit that I don't really have a feel for the accuracy and the timeline at the moment. Maybe I'm just suffering from BIAS because that happened to me last month with two values.
On the other hand, it kind of challenged me to really try it out for myself and see how often and with what increase you can go out :-)

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Kevin E.@KevinE

1Yr

@ag84 Good luck!

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TomTurboInvest@TomTurboInvest

1Yr

@ag84 How do you arrive at a fixed time period such as one month? Wouldn't it be better to focus on defined entry and exit points, e.g. derived from technical indicators?
I.e. a share can sometimes run longer, but much more than 5%
PS: much more important for the beginning is the targeted selling point in case the trade does not work out as desired! Money management! If you are interested in this topic, you will find a pinned post in my profile

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ag84@ag84

1Yr

@TomTurboInvest This was just an initial assumption, taking into account the need to achieve a high frequency of small wins. In order to create frequency, you have to abort an attempt at some point or consider it a lost attempt.

In the example mentioned at the beginning, the assumption or goal was to achieve 5% 12 times a year, in other words once a month.
If a value was then at 3% after one month, for example, you would take the 3% with you and start a new attempt instead of taking 2 months to reach 5%.

What technical reference points did you have in mind?

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TomTurboInvest@TomTurboInvest

1Yr

@ag84 technical chart analysis - points with a lot of volume... resistance or support etc...

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ag84@ag84

1Yr

@TomTurboInvest that would of course be a more precise approach in the evaluation for the exit.
First and foremost, I wanted to challenge the idea of betting on short-term developments.

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View all 2 further answers

Lukas M.@Lukas2998

1Yr

I'll put it very directly, please don't take offense, I don't mean any harm. But what you are showing is not a strategy. You can't just say that from next year onwards I'll only invest in companies that will make 20% gains. If your suggestion worked like that, we would all soon be multimillionaires.
Do you know the Dunning-Kruger effect? You're at the 'peak' right now.
https://www.growganic.de/dunning-kruger-effekt-teufelkreis-der-inkompetenz/

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ag84@ag84

1Yr

@Lukas2998 Thank you for your answer and the critical words. My point is not to claim that I will always achieve the results of the example calculation. I did not claim that either.

This should only be the starting point for a constructive discussion.
In another answer, for example, the difference between investing and trading was emphasized and should not be confused.

This was a very important clarification for me in my thought process, because these are completely different approaches and therefore completely different strategies:
A: opt for a stock that you hold for a long time and thus participate in the long-term increase in value
B: Rather focus on many small successes, but at a much higher frequency

I don't yet want to make a final assessment of how promising this approach is - the rather skeptical evaluations here definitely help me with my personal assessment.
However, I still see opportunities in rather short investment horizons.
This approach can also be completely absurd, otherwise there would be no day trading or certain option strategies, etc.

In any case, it is also very interesting to see how this sample calculation apparently triggers some people. I'd like to make it clear once again that I'm not talking about the 60%, but that the example is only intended to illustrate that small fry make muck (sometimes perhaps even more)...

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Lukas M.@Lukas2998

1Yr

@ag84 Whether you call it trading, investing or whatever, it won't work the way you think it will.
And the mere fact that day trading exists does not mean that it works. The majority of day traders lose money. And of the few who don't lose money, even fewer manage to outperform a broadly diversified ETF.
It's not the math that triggers people. It's more the fact that you're talking about absurd profits here, but your plan has absolutely no substance. Your calculation may work in theory, but it requires the right selection of companies and the right timing. You say nothing about this and that's exactly where it will fail.

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ag84@ag84

1Yr

@Lukas2998 I completely agree with your penultimate sentence. The choice of values would of course be decisive. But that was not the point of the discussion. I was more interested in discussing the short-term and long-term perspective.
Timing and selection are certainly the greater challenge in the short-term variant.

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Christoph@ChrisBizz

1Yr

I also think that the stock market farmer's rule refers to frequent strategy changes and not to frequent trades.

Your strategy can basically work.
If your trades have a CRV of e.g. 2 (i.e. in your example max. 5% profit against max. 2.5% loss), a hit rate of 35% is already sufficient to achieve a positive expected value (of course without taking taxes and trading fees etc. into account).

Here is an interesting article with a table:

https://stock3.com/boersenwissen/crv-und-trefferquote-was-jeder-trader-wissen-muss-6865429

With the appropriate effort, this can be done profitably. Why don't you test your idea with a demo account and tell us about the results here 😉

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ag84@ag84

1Yr

@ChrisBizz Thanks for the linked article! That pretty much sums up what was initially buzzing around in my head and concretizes it well! I will be looking more closely at the evaluation / assessment of CRV & hit rate next!

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Carlo@Carlooooo

1Yr

Another problem is that if a value doesn't go up 5% but down... what do you do? Wait? Sell and buy new? The calculation looks great. But in most cases it tends to backfire

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ag84@ag84

1Yr

@Carlooooo Yes, good point! Downside protection and a maximum holding period would definitely have to be defined. The failed attempts would then of course have a negative impact on the annual return.

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Baluga@Baluga

1Yr

Let's take a coin and try to get tails 12 times in a row. If you can do that, you can also do it on the stock market ;)

Btw there are really many stocks that make >48% per year. Apple, NVIDIA, etc. That doesn't have to be the case again in 2024, but it's still 100 times more likely than flipping heads 12 times.

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ag84@ag84

1Yr

@Baluga Hi, as already mentioned a few times, it's not about the 12x in succession. It is merely an exemplary calculation intended to illustrate the principle of multiple small wins. Of course, not all of them work.

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Kai@Dividenden-Sammler

1Yr

in addition to the fees, you must not forget the tax. and then you must not make a mistake with your 12 trades.

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ag84@ag84

1Yr

@Dividenden-Sammler Thank you for your answer!

Of course, the tax reduces the actual return once again - but in the example I was less concerned with the 60% as such, but rather with the mathematically significant difference between investing x€ once / long-term in a security or increasing the frequency of lower returns through short-term trading.

Of course, you have to achieve the 12 first and of course a certain percentage may not work out.
I am more interested in the fundamental differentiation of strategies.

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Tobi60@Tobi60

1Yr

@ag84 I would try the 5% and sell right away with one or two stocks at most and never with the whole portfolio. Because it probably won't work with all 12 stocks

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ag84@ag84

1Yr

@Tobi60 Thank you for your answer - the idea would actually not be to do this with the whole portfolio, but to take an amount X and bet it on a short-term rising value. When the trade has reached the target and the value is sold again, the next attempt would then be made.

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Hendrik@ChickenHenne

1Yr

@ag84 But you haven't said anything about your strategy yet, have you? Just saying that you want to make trades and thus achieve an excess return compared to a broad index is not a strategy. It only starts with the question of HOW you want to select and execute these trades.

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ag84@ag84

1Yr

@ChickenHenne I'm not interested in the HOW, but rather the WHAT.
In addition, the article was not intended to present my strategy, but to contrast two strategic approaches for discussion in order to make it easier for me to decide in favor of one, the other or something in between with additional information.

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LoneMelone@TradingMelone

1Yr

The classic 100% win rate

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ag84@ag84

1Yr

@TradingMelone Thanks for the answer - it's clear that a 100% hit rate is not possible. But even with lower hit rates, there are still interesting chances.

I just wanted to show in an example that many small profits can also yield an interesting return on the bottom line.

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LoneMelone@TradingMelone

1Yr

@ag84 No, you're making a huge mistake.

Assuming you set stop losses so that your losses don't completely ruin your return. For example, 1% of your portfolio per lot. Then we are already in regions where you will probably be stopped out more than you win because you probably don't understand TA. Then you either have to work without a stop loss or with a higher one. With a 5% stop loss of the portfolio value you have a 1/1 risk reward, which means you need at least 55% win rate, which will be difficult without TA understanding with the stop loss values. With no stop loss you actually need 90% win rate and again it is unlikely and gambling.

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