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How to Turn Back the Clock and Backtest Your Strategies

Whenever we close our trades, we will often think to ourselves – could I have taken more profits? Would there be a way for me to have a better entry? If I did this or that more consistently, would it have been better for my portfolio? 

There will always be things we can improve on, and asking these questions is a good first step. In order to really hone our edge and become traders, we have to take the next step and that is to backtest our system. Whether it be for missed trades or testing different approaches to your past trades, backtesting lets us test changes to our strategies. With the InvestaBacktest, we can simulate going back in time before any moves could have happened. 

Let’s take a look at how we can effectively use the InvestaBacktest to hone our trading systems.

  1. Choose a stock and date to go back to

There are two ways we can look for a stock and time period to test. The first way is to go back to trades we missed and see if our strategy is suited for catching those kinds of plays. 

Here we will just input the stock and the date before the move we missed so that we can simulate what the chart would look like before the move itself. Since we know how things will unfold, we have to be as objective as possible and really stick to the strategy we want to test. 

Another method could be selecting random stocks and picking specific market environments to trade in. Whenever we stress test our strategies, we should always be aware of what is happening to the market index as our strategies should naturally change whenever broad market conditions change. Even if, for example, we have a solid system for breakouts, it will most likely crumble if trades are forced during bear markets. Of course, there is merit in seeing how systems fail in bad environments, but we won’t be able to get any insights if we’re just randomly backtesting in an unknown environment. 

  1. Set the indicators for the strategy to be tested

Once we have the set of data we want to backtest, we then input the indicators that we would be using for the strategy to be tested. No extra fuss whatsoever, it will be exactly as if we went back in time when we see the chart.

  1. Trade as if we don’t know what will happen

When everything is all set and ready to go, we now just have to trade and see how we perform. The execution is simple, we can just click the “NEXT DAY” (shortcut: Q) button to go one candlestick forward, and click the “BUY/SELL” (shortcut: E) button to buy or sell. 

Although it might seem like a small thing, the InvestaBacktest’s feature of not knowing what will exactly happen with the next candle really helps us be more objective. Compare the above picture to the one below.

Again, we might already know what will happen, but being able to not see the exact movements lets us better fight biases, where we would trade more perfectly just because we already know what the next candle looks like

  1. Check how the strategy performs

Lastly, once we have backtested as much as we want, it’s now time to check our results. By clicking the “End Backtest” button, the test will be stopped and our trade history along with some statistics will be shown.

We can see how long our trades lasted, how much we gained per trade, what our total win rate is, and how much our total gain is.

One last thing that you should be wary about when backtesting is that there is such a thing called the optimization bias. Many traders want to have the perfect trading system, so while they build and backtest their system they keep on adding more and more complex rules or indicators to have the perfect entries and exits. Having an incredible system is good, but it is important to know that there is no holy grail in trading. All systems will be subject to losses, and if a system seems too perfect, it will likely have been subjected to lots of optimizations that make it unrealistic to trade with in real-time. The rule of thumb to remember is to keep things as simple as possible.

As you can see, it is really simple to use the InvestaBacktest as we wouldn’t need to know anything about coding as with what other programs use. We would only need an InvestaPrime+ subscription at the least along with our trading system to test. 

Want to know more about what we offer? Head on over to the InvestaPrime landing page to look at all the features that we provide to our subscribers!

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How to Find The BEST Stocks and Crypto to Trade

Planning is a very crucial task in trading. As they say, if you fail to plan, you are planning to fail. As a trader, you should always have a plan for any situation that may happen. Part of the planning process for every trader will always include looking for the best stocks to trade. You always have to find the best stock that fits your style of trading. It would be troublesome to go through each and every chart just to filter out ideal trade candidates. Luckily for us, there is the InvestaPrime ProScreener to help us look for the best trading opportunities. Using the InvestaPrime ProScreener will let us save a lot of time as it will do all of the screening and filtering work for us. It’s even easy to use! You just need to know what kind of trade you are looking for. Since stocks in a strong uptrend are the easier stocks to trade, let’s focus on finding opportunities for continuation pattern trades and momentum trades. 

Let’s go over how we can use the InvestaPrime ProScreener to make trading easier for us. 

  1. Market

Before you look for stocks or other assets that you would want to trade, you would first have to set which market you are looking to trade in. 

We offer our screening services across seven different exchanges:

  • Philippine Stock Exchange (PSE)
  • Singapore Exchange (SGX)
  • Commodities (CMD)
  • Cryptocurrency (CRYPTO)
  • Forex (FX)
  • New Year Stock Exchange (NYSE)
  • Nasdaq Stock Market (NASDAQ)

  1. Trend Parameters

You would want to use the Moving Average Parameters in order to look for stocks that are in a strong uptrend. An example of this would be to use these parameters: 

EMA 20: Moving Average above EMA 50

EMA 50: Moving Average above EMA 100

EMA 100: Moving Average above EMA 200

By using these as your parameters, you will be able to find stocks that are in a strong uptrend. When these moving averages are aligned, it means that traders invested in this stock are making money and the outlook is bullish for the near future.

  1. Value Average 

Aside from finding stocks in a strong uptrend, we also need to check how liquid these stocks are, or how much money is being exchanged. Value Average refers to the average total amount of money that goes in and out of a stock for a certain period. Although a stock may be in an uptrend, a low Value Average shows two warning signs. First, if you are investing a big amount, you may have difficulties selling later on if liquidity is low as you may find it hard to find buyers for your shares. Second, a low exchange of money within a stock may signify that there really isn’t that much interest for the stock as not a lot of people are trading it. Although liquidity isn’t that much of a problem in the U.S. and crypto markets, it is a necessity to look at liquidity when trading the Philippine markets.

To look for stocks that have shown to be liquid, an example would be to use these parameters: 

Value Average (20 Days): Value Average >= 5M

By using this parameter, you will be able to find stocks that have at least 5M worth of PHP or USD traded per trading session. 

  1. Fundamental Filters

Aside from Technical Analysis, Fundamentals should also be taken into consideration depending on the market that you would want to trade. For example, if you are looking for strong uptrending stocks in the U.S. market, then it would actually be ideal to look for high P/E stocks to trade. P/E, or the Price to Earnings ratio, is a measure of how cheap or expensive a stock is. Although it may be a common idea to look for cheap stocks, when looking for stocks in a strong uptrend a higher P/E ratio is actually ideal as you are looking for companies that are in their explosive growth stage. This means that their earnings are not yet there since they are still developing, but investors are already placing a premium for their shares as the future potential is too good to pass on.

An example of a Fundamental Filter for these kinds of stocks would be: 

P/E Ratio: Over 20

By using this parameter, you will be able to filter for companies that are being priced at a value a lot higher than its current earnings due to the potential of exponential growth.

These are actually just a fraction of what you can do with the InvestaPrime ProScreener. We have multiple screener filters that you can play around with in order to really find the best trades that you can take, from looking for stocks that are making new all-time highs, to being selective and minimizing your search to only select industries. 

When you launch the InvestaPrime ProScreener, we have pre-made screeners for different trader types and different needs should you want to use some of the screeners even we use for our trading. 

Want to know more about what we offer? Head on over to the InvestaPrime landing page to look at all the features that we provide to our subscribers! Start your FREE 14-day trial today.

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Do I Need a Trading Break?

When we want to do things for a prolonged period of time, it is necessary that we take the appropriate amount of breaks at the appropriate times. But how exactly would a trader determine when to take a break when the markets trade for 5 days a week? Before we move on to the “when”, let us first discuss the “why”. 

For starters, taking trading breaks is necessary for the long term sustainability of your trading. Let’s say that you are on a losing streak  and you are trying to decide whether to take a break or not. On the one hand, taking a break for one week will let you evaluate your system.

On the other hand, continuing to trade despite your losing streak might be what you need in order to end the streak. Although continuing to trade might sound like a compelling option, there is a possibility that you’ll end up with more losses thereby by lowering your spirits which eventually leads to the end of your trading journey.

Journaling

Now that we have established the importance of taking breaks, let us discuss exactly when you should take breaks. It is worth noting that these tips are only possible through journaling or the act of recording your trades. You can use anything from Investajournal to simply using a notebook to record your trades as long as the journal contains your entry and exit prices as well as your entry and exit reasons. Now that we have our journal, we must discuss two important metrics: VAR (Value at Risk) and Exit Notes.

Value at Risk

Value at Risk (VAR) is actually a statistical measure used by financial institutions in order to determine the risk involved in a certain portfolio. However, in the context of retail trading, VAR pertains to the amount that you are risking relative to the size of our portfolio. So lets say that you have PHP 100,000 in your portfolio, 1 VAR is equal to PHP 1000. This means that if a trade involves the risk of losing PHP 1000, then you are risking 1 VAR. 

So how can we use VAR to determine when to take a break? Well, it can be as easy as taking a break when you are down 10 VAR. This means that if your initial capital of PHP 100,000 has turned to PHP 90,000. This is the perfect time to take a break because it shows us that there is something wrong with our system. Losing 10% of your portfolio is not something that you should take lightly. This requires an evaluation of your system that usually entails virtual trading and continuous learning. 

Another metric that you can use is if you lose 5 VAR in consecutive trades. So if your capital is PHP 100,000 and you raise it to PHP 120,000 but lost PHP 5000 in consecutive trades (net PHP 115,000), then maybe there’s something happening to the market that requires you to adjust your system. In summary, you can either take a break when you’re down a certain number of VAR from your capital (regardless of win/loss ratio)  or you can take a break when you lose a certain number of VAR to consecutive trades. 

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Exit Notes

Aside from the amount that we gain/lose, we also have to look at WHY we lost/gained money. Basically, if you are losing for the same reasons (e.g. failed breakout, whipsaw) then maybe you need to adjust your system in relation to that.

An example is adding Average True Range (ATR) to your system to avoid further whipsaws. It’s easy to say that you don’t need to take a break to adjust your system but in reality, you cannot be objective with your trading setup if you have open positions.

Conclusion

It does not matter if you are a beginner or an experienced trader, everyone goes through losing streaks. In the end, we have to remember that bouncing back from losing builds character which is the primary tool that we need in order to find success. However, you do not need (nor should you)  bounce back right away. Oftentimes, a break is necessary in order in order to avoid making the same mistakes that brought us to our downfall in the first place.

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Bottom-up Approach: An edge to navigate the markets

Amidst the Stock Market crash across the globe last March of 2020, novice traders have turned a blind eye in the markets since then. It somehow makes sense. The pandemic has caused tremendous financial damage across the world.

Although, the financial markets, especially the US stock market, started to rise a few days after the market crash of 2020. In the context of measuring the March low and the September high, the $NDX rose 84%, the SPX rose 63.5%, and the DJI rose 61%. Within six months, the stock market presented loads of opportunity to those traders who used the Bottom-up Approach to navigate the markets.

As introduced by Mark Minervini in his book “Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market, ” the Bottom-up approach is a type of method in selecting a stock. It is where a market participant shifts their focus on individual stocks first, then its respective industry group or sector, then its separate market index.

Through this approach, the index and any adverse event do not discourage the market participant from trading. If you have applied this method during the April recovery, then the said trader would have maximized the US market’s up move.

Figure 1: Example of a VCP pattern

The key to identifying market leaders through the bottom-up approach is to spot names hitting 52wk highs or All-Time highs exhibiting a VCP pattern in its price behavior. It is a pattern that displays contraction in its volatility from its previous data to the following or present data.

Moreover, the said stock should be in the confluence of a surge of volume when creating a new move on the upside. Various names that have hit such parameters in a respective sector will often be the leaders.

Also, during a bear market, spotting names that are creating new highs with enormous volume, while the market is doing otherwise, is a good indication that when the bull market comes, the stocks that were unveiling such features are bound to become the overall market leaders for that period. They correct the least during a general market correction and rebound the fastest during a market recovery.

On the other hand, the Top-down approach is the opposite of that of the Bottom-up approach. This method’s problem is that a market participant gets discouraged from the overall indices and market sentiment. The top-down approach would limit the trader from the outliers or the potential market leaders that would move oppositely to its respective index.

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If a said market participant adheres to the Top-Down approach, the chances are that the specific trader has loosely participated in the April 2020 rally. Wherein, these types of traders may have only grasped 5% of the overall opportunity that was offered by the financial markets.

There is no right or wrong approach to trading the financial markets. As Mark Douglas always exclaims, trading is an activity that offers the individual unlimited freedom of creative expression. Although aspiring market participants should be aware of the pros and cons of both methodologies.

Although professional traders use the bottom-up approach, wherein a trader does not rely on the opinions of other market participants; instead, they rely on their own bias towards individual names. 

Are you a trader who employs the Top-down approach or the Bottom-up approach? Let us know in the comments section below!

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Featured Trader of the Week: One Shot

We would like to congratulate our featured trader for this week: Oneshot a.k.a @franzjion!

One Shot was able to eye I-Remit, Inc. a 19 year old remittance company that is one of the top here in the Philippines. One shot a.k.a @franzjion, is a deadly breakout trader who actively contributes to the Investagrams community with his expertise in using Technical Analysis to predict and time entries just before breakouts.

One shot had his sights on $I for a while before entering his position about a month ago. He skillfully used historical data since 2017 to perfectly time I-Remit’s breakout from the very strong resistance level at the 4.00 mark.

He also utilizes fibonacci levels and historical peaks to forecast possible breakout levels that can be reached. Moreover, he uses MA Cross 50 and 200 to indicate possible starting breakouts. One shot’s prediction is nothing short of skillful technical analysis as the price dipped down to the centavos before rocketing up and above the 2-peso level.

Besides $I, One shot also spotted breakouts from $APL and $FNI. He really has an eye for breakouts as his forecasts for the two are also spot on. One shot’s philosophy is all about smart positioning and entry at safe entry levels and letting the price action do the work for him.

By entering at very low and safe entry levels, he minimizes risk as the stock has nowhere else left to dip. After entry, stop losses below the support level is set, with Take Profit levels around the Fibonacci levels he plotted. Trail stops are then implemented once the initial Take Profit level is reached, ensuring a risk free trade with unlimited upside potential.

One shot is lethal with Technical Analysis in spotting breakouts, but he is nowhere near lacking in Fundamental Analysis. Fundamental Analysis is crucial for One shot to be one step ahead from other investors and entering a trade before a breakout. One shot displayed his Fundamental Analysis skills with $APL as he extracted news to support his prediction.

Congratulations to those who were able to profit from breakouts of $I, $APL, and $FNI, and kudos to One Shot a.k.a @franzjion. Your FREE 1-Month InvestaPRO is on its way!

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Featured Trader of the Week: Iskidrow

As of this writing, the local index created a continuation pattern that isn’t pleasing as the price action proves otherwise. Although, the reverse will be true if the local barometer manages to breach the 7200 levels that may serve as leverage to propel its way upwards. 

Along with this, numerous names have emerged and one of which is Pilipinas Shell Petroleum Corporation or $SHLPH. Iskidrow (@iskidrow) successfully traded the stock before his analysis. This trader is an active member of the Investa community who boundlessly delivers his breakdown of local stocks with the use of Technical Analysis. 

This trader specifically highlighted the bigger picture play that recently materialized. The said stock managed to break the 19-peso structural resistance of the said underlying base that had a build-up of 9 months prior to the breakout. The said consolidation pattern was supported with below-average volume, although before its initial move, it is seen that its volume was picking up. 

The initial breakout was also supported with massive volume, along with the RSI (14) 70 breach, which indicates that the stock is currently in a parabolic state. The stock must maintain the 19 to 20-peso levels to further proclaim its stance.

Moreover, it is a low-risk, high-reward trade, as the stop loss levels for the said breakout point of the consolidation pattern is around 18.5 (-5.3%), and the take profit areas could be the structural resistance at 24 to 26-peso area (23% to 33%).

In the bigger picture, it is observed that the stock is badly beaten. For a reversal to occur, the stock must rebreak and hold its previous 52-week high levels. Else, its down move may still occur. Although note that the price targets are merely based on technicals, which means that we must be prepared whenever the stock goes against our bias. 

Congratulations to those who were able to maximize $SHLPH’s big up move. Lastly, kudos again to Iskidrow (@iskidrow) for sharing his trade analysis. Your FREE 1-Month InvestaPRO  is on its way!

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5 Common Reasons People are Afraid of the Financial Markets

The stock market is the ultimate equalizer of wealth. Various individuals who participate in the said market have made fortunes in trading or investing in this financial instrument. However, it is a fact that not everyone is profitable in this field.

Why is that so, you may ask? Various aspiring market participants head right into the markets without the proper knowledge in the said endeavor. 

Here are various reasons why individuals are afraid to invest or trade in the financial markets:

The Stock Market and other financial markets are for rich people.

Many people think that this endeavor is only for millionaires or whatnot, but in fact, it isn’t. You can place as low as 1000 pesos in the Philippine stock market in one of the best brokers here in the country. Although as a starter, it is best to place funds between 30k-50k to experience the market’s impact. 

Even if you don’t have enough money yet, don’t let that become an excuse. You can still practice trading or investing through Investa VTrade. It is a platform where you can enact your trades using virtual money. 

It is conventional wisdom that physical businesses are more resilient than allocating wealth onto the markets.

It is a fact that physical or traditional businesses create wealth. Although an additional stream of income through the financial markets, along with other investment vehicles such as fixed income assets, etc. is ideal to ensure our longevity in terms of finance. 

It isn’t easy to trade or invest in the financial markets.

Indeed, it is. It takes time to be resilient in this craft. The key is never to give up in this endeavor, despite the early losses you will encounter. Mark Minervini, one of the best traders in this world, only started to earn money from the markets after his 6th year in trading. 

It is an activity that also tests your emotional quotient. Trading the markets can be an emotional rollercoaster ride at first. Although, if you are committed to learning about this craft, such experience can be eradicated.

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Many individuals think that it is a quick-rich scheme; therefore, many individuals lost money in the markets, which has led to many people being afraid of investing or trading as they think that it is precarious. 

Engaging in financial markets involves risk. Although, entering the markets without the proper knowledge will amplify the risk embedded in the markets. An aspiring market participant should know what they are getting into, wherein the said individual should be committed to this lifelong activity where continuous learning must be applied. 

An aspiring market participant should only invest what they can afford to lose. An emergency fund is essential just in case a black swan event may occur.

If you are lost, and you do not know where to start, then the InvestaUniversity program is here for you! It is an online class program wherein the concepts of Technical Analysis, and Fundamental Analysis are taught for free. You can join HERE. 

It takes a lot of effort to excel in this endeavor.

Undeniably, an individual should pour their conscious effort and deliberate practice to being one step closer to becoming a professional trader or investor. This doesn’t mean that your eyes shall be glued onto your monitor screens 24/7.

An aspiring market participant should make hardcore preparations before the market opens. During market hours, the individual should only worry about their executions. Even Mark Minervini only spends 50% of his time in front of a monitor. 

In conclusion, it is not easy to make money in the markets. Trading is not for everyone, just like any other endeavor. It requires patience, commitment, and hard work, which may deter anyone who thinks that the financial markets are a quick way of accumulating wealth. Indeed, it’s all about sustainability in the long run. 

 

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