Saturday, November 25, 2006

Are You Holding It Long Enough?

How many times have I read on one BLOG or another - "man - I sold that one too early" - for that matter how many times have I said that? At least once that I remember - - (actually more times than I care to remember).

Well let me tell you this about that - for every time you hear or read that statement there are probably 10 more times when someone says - "held it too long - lost all my gains."

I decided to test a premise or two regarding this idea of "holding too long/not long enough" and came up with some amazing results. The filtering software I use - stockfetcher.com - has the capability to do moderately sophisticated backtesting. One of the things it allows is for you to set-up a variety of exit criteria. I thought I'd take advantage of that capability.

I took a very simple filter that I am working on - one moving average crossing another that throws off a profit over time. (Actually it is an EMA crossing a simple moving average and it seems to have promise - if it proves out I'll publish it - I promise.) What I did was set up a simple exit criteria - a stop loss set at 10% coupled with three levels of profit for exit - 5%, 10% or 15%. In other words if I hit a profit at one the pre-selected levels I would close the trade. I kept my normal set-up regarding number of plays per day (1) and number of stocks in the portfolio (4) and number of days to hold maximum at 4.

Here are the results: 5% profit = $9746, 10% profit = $9479 and 15% profit = $4546

Amazing - by asking for a lower profit performance we actually achieved twice the amount of profits.

Ok a couple of things. First - the exact same set of stocks were selected and played in all three tests. Second - only closing values were used. In other words if any stock hit 15% intraday and then traded below that at the close - it was held another day and it might not have reached 15% again. Third all holdings regardless of their profit/loss status were sold on the fourth day of holding or on the last day of the test.

Bottom line of that - if a human were watching this they might have improved on the numbers a bit. But because the results at 5% are twice as good as 15% and the 10% result is nearly as good as the 5% I wouldn't expect great improvements - some maybe but not great ones and - by keeping the entire thing mechanical you can't second guess.

So it appears if you lower your profit target there is a possibility that you will increase your profitability. And that is always nice - isn't it?

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