Continuous asset building requires a systematic concept of proven strategies that together form a trading system. In bullish market phases, we add to the portfolio high-quality equities, which have stable trends, while as few market profits as possible in bear market phases. We show you two profitable core strategies, based on a proven Relative Strength concept with an optimized trend filter in the equity sector. From numerous strategies we have made a selection and combined them into a trading system. This concept of asset building is referred to as "World Wide Stock" trading system, WWA for short. Only a predefined selection of international equities is traded. The entry and exit signals provide individual strategies. In this article, we will present the two main SIMA and SAKIR strategies and will present the underlying rules. Apart from these two Long-Strategies, the complete WWA trading system also consists of four other Short-Strategies. Each strategy is profitable.
To further optimize the effectiveness and the risk characteristics, we also work with two independent trend filters (see Figure 1). Our position management assigns to each strategy with its filter a percentage of the account to be managed, in our case 50 percent (Figure 2). The implementation of the signals takes place via shares. The time horizon varies according to the stock market and fluctuates from a few days to several months in particularly strong trend markets. On average, the holding period is 160 trading days with a hit rate of 71 percent over the last ten years. Own stock selection offers a profit advantage.
Both equity strategies are completely independent from each other, but they are based on the same predefined selection of 160 high-quality shares from all over the world. The criteria for inclusion in this stock index include the overarching chart trend in the weekly chart, solid fundamental data, long-term success with constant dividends, steady growth with preferred brands, or even market leadership, but also low volatility and sufficient liquidity at the respective home exchange. In the equity index itself, we also find a balance between the sectors, a balanced division between European and US equities and a healthy relationship between offensive and defensive share certificates.
Our two trend filters are safety devices that have proved themselves in all crises of the past 30 years. For the strategy Intermarket shares (short: SIMA) we switch a self-developed intermarket trend filter. Intermarket analysis takes into account the market-ecological factors of interest rate developments, inflation data as well as currency-trends and commodity-price-trends as market-influencing factors on the economic-cycle and thus on the exchange-cycle. The capital circulates between the four large asset classes (bond, currency, commodity and stock markets), thus forming the dominant market trends. For the calculation of a trend direction, these influencing factors are evaluated as positive or negative. If at least two influencing factors are positive, we define a bull market. In this case, SIMA buy-signals are systematically implemented. If at least three of these influencing factors turn into negative, we expect a bear market. This results in a direct Exit from all existing long positions of this strategy and creates capital for short strategies. All new buy- signals are ignored in this bear market until at least three factors turn positive and thus define a new bull market for us. For the filtering of the strategy of the equity-climate-index by relative strength * according to Levy (short: SAKIR) we switch to a purely technically based calculation. This distinguishes the SIMA-strategy with intermarket-filtering. For technical analysis, we have compiled a global index of 25 stock indices. The average relative strength of this world index defines a climate indicator. If the value of this global climate indicator is greater than one, we understand this as a bull market and all SAKIR signals are systematically implemented. Values smaller than one represent a bear market and lead to a direct exit from all existing long positions of this strategy. New buy-signals are ignored in this phase and free capital is available for the short-strategies until the value increases again.
The concrete entry
The entry through the equity-strategy-SIMA can have further profit advantages if a signal matches a bullish confirmation through the Intermarket-trend-filter. If the trend filter is in the "bull mode", we sort our own index of 160 shares according to the relative strength concept according to Levy (short: RSL) by a factor of 260 and form a numerical ranking list (Figure 3). The seven strongest shares are bought. If one of these shares falls below the threshold of 50, it is sold and replaced by the latest stock that made it into the top seven. Thus, the threshold value 50 functions as a system-based stop-loss. A further profit advantage is also possible for the entry through the equity strategy SAKIR, if a signal agrees with a bullish confirmation by the stock-climate-trend-filter. If the trend filter is in the bull mode, we also sort our own index of 160 shares according to the RSL concept by a factor of 130 and calculate a percentage value relative to the total index according to the trend strength indicator concept (Figure 4).
The strongest share can have a maximum of 100 percent, the weakest zero percent. The seven strongest shares over 93 percent are bought. However, if one of these shares is below 25%, it will be sold and replaced by the latest stock that has made it over the 93% hurdle. The 25 percent threshold acts as a system-based StopLoss. In order to reduce the trading activities for both strategies, we do not check this level every day, but once a week, and always switch the signals on the next day.
Exit Criteria and Stop Techniques
Both strategies work with system-based StopLoss techniques on a daily closing-price-basis. The system checks every Thursday after closing, whether a current stock position in the account remains, to be replaced or sold. This means that a classic stop with a fixed value is not provided in this system. It is also important for the trader that the two strategies are not based on classical charts, moving averages, chart formations or similar methods.
Risk- and position-management
In addition to the different approaches of the equity strategies SIMA and SAKIR, risk management also includes their independent trend-filtering. In position management, we work with a diversification from a maximum of 14 different values. The retail-trade is almost meaningless for the development of the capital curve. It always counts the total result of all trades. Because this is a combination of two independent strategies, contradictory situations can occur. Such a case arises when SIMA already sells its share in the total deposit, while SAKIR continues to hold or even buy shares. During the real implementation it is possible both approaches start from different market phases (bulls and bear mode). For this reason, we weight all positions as a percentage of the current state of the total depot and work with a dynamic position size. If our portfolio increases, new positions are larger, if the portfolio falls, new positions are correspondingly scaled down. With a maximum of 14 shares in the portfolio, this corresponds to a percentage weighting of 7.1 percent per position.
All purchase and sale signals are executed within the following trading day at the respective trading hours of the home exchange of the share. This is especially important when leveraged derivatives such as certificates or warrants are traded on the respective signals.
How much capital is needed at least?
In order to profit optimally from the profit advantages of these strategies, an account size of € 10,000 is shown as realistic starting capital. Since we work with 14 positions, we have statistically evaluated the minimum depot size based on the results of the last 30 years. This starting capital is sufficient so that the individual positions do not become too small and thus the fixed costs are not too important.
The two strategies combine tried and tested concepts to achieve a functional, successful and unemotional asset growth with equities. This resulted in an annual profit of 25 percent on average, with a maximum draw down of about 18 percent over the past few years.
Falk and Arne Elsner. Falk and Arne Elsner jointly run the website ww.tradingbrothers.com. Falk has been acting as a private full-time trader, analyst and systems developer for years. They work closely with the experienced investor Dr. N. Müller and offer seminars. You can profit from the results of the presented strategies through the TradingBrothers service brochure. www.tradingbrothers.com
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