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I'm looking for basic trading strategies that are known to show positive expectancy. Could you support your answers with some examples?

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    if something like this existed then everyone would be rich, there's no silver bullet for making money in the stock market. – RAZ_Muh_Taz Aug 29 '18 at 22:44
  • @RAZ_Muh_Taz Do you mean that some strategies are context-dependent or that no strategies ever work in any context? – Rick Sanchez Aug 29 '18 at 22:55
  • @Kevin Fair long term holding strategy. I'm just wondering if such thing as short term / swing trading strategy exists as there are lots of people who pretend it does but I'm quite sceptical. – Rick Sanchez Aug 29 '18 at 23:59
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    I think that sometimes you can find and edge and if so, you scale up to take advantage of it. With a large amount of trading, most of the time, you're going to have something in the vicinity of a 50/50 win rate, give or take. Since the win rate is outside of your control, the only significant way to influence the P&L is to make more money when you are right and lose less money when you are wrong. Disciplined risk management is where the consistent profits come from. as the old saying goes, you have to " cut your losses short and let your winners run". Without that, you're dead meat. – Bob Baerker Aug 30 '18 at 0:08
  • @BobBaerker I tested that theory on forext & Metatrader4 a few years back, I'm a programmer so I made a variety of tests/bots over historical data. The conclusion was that the win rate is proportionally correlated to the PL ratio. For instance, 50/50 win rate on a 1:1 PL ratio, then changing the TP and SL to have a higher PL ratio decreased the win rate proportionally, 30/70 win rate on a 1:2 PL ratio and so on. So there seemed to be no way of getting an edge with a system. But that was forex, stocks may behave differently. – Rick Sanchez Aug 30 '18 at 0:45
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Buy index funds with the lowest practical expense ratio. My reference is John Bogle's seminal work, Common Sense on Mutual Funds.

If you want it to be more complicated than that... then invest half your money Bogle's way and play with the other half. See what does better consistently, in the long term, and net of all costs/fees.

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I have a positive expectancy with my strategy.

At the moment my win rate is 54% and my P:L ratio is 1.84:1, giving me an expectancy of $620 per trade. My aim is to get my P:L above 2:1 whilst keeping my win rate above 50%.

The strategy is to buy financially healthy and up-trending stocks on the ASX200 and place a 16% trailing stop loss. As long as the ASX200 keeps up-trending, then if I am stopped out of a trade I will immediately look to get into a new trade. I am to keep a maximum of 15 trades open at any one time. If the ASX200 starts to down-trend then I will not open new trades once I am stopped out of existing trades.

My biggest win so far is about $8000 and my biggest loss so far is about $2300.

I am trading share CFDs, started with $50K in February and have so far made $24K profit this year.

  • Somewhat tangential question: how do you decide to make new trades after the downtrend? An uptrend on the ASX200 ? How long an uptrend? A day? A week? A month? Curious minds want to know. :-) – Peter K. Aug 30 '18 at 12:11
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    @PeterK. - for the trend of the general market, in this case the ASX200, I determine the trend based on the weekly chart. An uptrend will last as long as it continues to have higher highs and higher lows. If you take the S&P500 as an example, it has been up-trending since March 2016. It took a pause in about Feb 2018 and looked like a downtrend was about to commence, but the uptrend re-commenced in July when price closed above 2802. I decide to open new trades only after the downtrend in the ASX200 ends and a new uptrend commences. This will keep me out of the market in scenarios like the GFC. – Victor Aug 30 '18 at 12:28
  • OK, thank-you! That makes sense. I'm waiting for the other shoe to drop on the market bull run, but am starting to think about what would put me back into the market if it dropped. – Peter K. Aug 30 '18 at 12:31
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It's certainly understandable that you'd want to beat the market (who doesn't?), but it's just not feasible. The thing is, there just isn't a strategy that can be used to reliably beat the market that's worthwhile after accounting for fees and taxes.

Smarter people than any of us have tried, and even the very few who may pull it off for a few years, or even a decade, typically fail to perform in the next period of time.

Even if there were such a strategy it would, inevitably, fail to remain a secret for long, and become useless when millions of others tried to emulate it. All of the publicly traded stocks on the market have to be owned by someone, and exactly half of those stock must perform below the average over any given period of time. The people who profit from investor's desire to beat the market are the brokers, the fund managers, and the IRS.

As long you as fail to do worse than the market, you'll do well for yourself. Get an index fund. They're about as cheap and easy as it gets.

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It is well known and many times discussed in the internet that even the best professional fund managers are not able to beat simple index funds in the long-term (for example: https://www.nerdwallet.com/blog/investing/index-funds-vs-mutual-funds-the-differences-that-matter-most-to-investors/, or google 'index funds vs managed')

That implies there is no better strategy than buying index funds and wait.

Any interaction from you makes your long-term expected gain worse - unless you are the one super-fund-manager that is better than all the professionals in the world.
Surprisingly many people believe so, and think they can do better, often because they were able to beat the market over a certain period of time.

It is a lot like playing roulette in Vegas and winning with 'your strategy' five times in a row - you tend to believe that you got the trick. There is no trick, and sooner or later you will lose, and your long-term losses will be higher than your gains. But as you can see, Vegas makes a killing on people that don't understand the math.

  • Don't confuse "index funds do better than average managed funds" with "no managed funds consistently beat the index funds" – Ben Voigt Sep 1 '18 at 1:23
  • @BenVoigt Definitely agree with that one. There is also a position size issue, moving millions at a time isn't as easy as moving a few thousands. – Rick Sanchez Sep 17 '18 at 0:58

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