Comparing Trading Strategies For Investors

Four types of trading strategies

Do university degrees really matter?

Well, if you’re hoping to work for a top firm, then apparently so.

A friend of mine is a senior manager at a big corporation. She got her start many years ago and worked her way up the ranks — much like I did, and maybe as you did yourself.

But nowadays it’s different…

She tells me the company’s policy is: No degree, no interview.

And we’re not talking about heads of department or board positions. Even the most junior staff need high-level qualifications.

Now that’s a big ask, especially for entry level positions. Someone could have a lot to offer. But HR may not look beyond page one of their CV. That’s a hyper competitive marketplace.

I remember a similar issue when I was starting out. It was all to do with grades.

You see, the top investment banks set the bar high. Graduates had to have degrees with a distinction average. While my grades were good, they didn’t meet the standard.

But I had a stroke of luck…

A friend was already working for a leading bank. He knew there was an opening for a part-time role and he put my name forward.

The introduction made all the difference. I was able to speak directly to the head of a trading desk. While my grades were of interest, it was his overall impression that got me the job.

Sure, degrees and grades are important.

But you often need to consider other factors to get the full picture.

Beginners trading 

Trading is no different…

But just like some employers, many people have a narrow view of what success looks like.

Let me give you an example.

This encounter took place a few years ago at a wedding…

I got talking to a guest about trading. His goal was to quit his job at a telco to trade fulltime. I was a trader at Bankers Trust back then, and my new friend was keen to know all about it.

One of his questions sticks in my mind to this day. He asked what strike rate I was getting on my trades. In other words, he wanted to know what portion of my trades made money.

Without a second thought, I said about 35–40%.

I remember his response vividly. He said, ‘Oh, that’s honest.

There was a moment’s pause. The response wasn’t what I was expecting.

Then it struck me…

He thought a low strike rate was bad. In his mind, I was saying that I wasn’t a good trader.

So I then added some key information…

I told him my average winning trade was more than three times my average loss. This meant I was actually a very profitable trader. I also said many of my colleagues had similar strike rates.

But I can understand the confusion.

The internet is full of ads for all sorts of trading services. Many of them claim to have exceptional win rates. This often bolsters the belief that ‘high grades’ equal success.

Comparing trading strategies 

I’m going to show you a snapshot of data. It’s the individual win rates for a group of traders. I want you to have a look, and then I’ll ask you a question.

Check this out:

MoneyMorning 13-07-18

Now, suppose you want to hire a trader. This person will have full control of your family’s share portfolio. Which trader’s CV would you look at first?

I’m betting you’re thinking Trader A.

It all comes back to the tendency of linking grades with success. Why would you consider someone who gets it right less often?

Here’s some more information:

MoneyMorning 13-07-18

Trader A is no longer top of the class. It’s Trader D who’s making the most money.

Now, these aren’t random numbers. They’re from a series of back-tests I did during the week. The purpose was to show you that there’s more to making money than a high strike rate.

Here’s what I did:

I added a profit-taking rule to Quant Trader’s algorithms. This increases the win rate, but reduces profits. The test period is over the last six years.

As always, each trade is for $1,000, and there is no allowance for costs or dividends.

Here’s the complete table:

MoneyMorning 13-07-18

The first two strategies are how many people trade. Locking in an early gain typically leads to lots of small wins. The problem with this is that it caps profits — you never get the big trends.

The third strategy gives profits scope to run. It then takes profit if a stock rises by 100%.

The final example is Quant Trader’s method — profits run until a stock hits its trailing stop.

Now, you may be thinking the 5% profit-taking strategy isn’t that bad. It seems to make good money and provide plenty of winners.

But there’s a catch…

Options trading is one of the most overlooked investment strategies that you can take advantage of right now. Get started with expert help — free!

Look at the average profit per trade. This strategy may well lose money after brokerage.

The 20% take-profit strategy is a bit better, although it’s no standout.

It’s only when winning trades are let run that things get interesting. You’ll see fewer trades and a higher average profit. The longer holding periods are also more likely to result in dividends.

There’s one last thing I want to show you. This next graph brings all the numbers to life. It charts the performance of the four strategies.

Check this out:

MoneyMorning 13-07-18


[Click to open new window]

The top line is Trader D — the lower strike rate option that lets profits run.

At the bottom of the pile is the seemingly successful Trader A, with the 87% strike rate.

Yes, metrics like grades and strike rates are important.

But they are just one factor…

Success often comes down to a blend of skills. For a trader, this could include their strategies for taking profits, cutting losses, spreading risk, or managing emotions.

So make sure you always look beyond a strike rate. There’s often a lot more to the story.

Until next week,

Jason McIntosh,
Editor, Quant Trader

Jason McIntosh

Jason McIntosh

Jason McIntosh is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

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