Inspirations

Details about the Emerging Monthly Mover FREE can be found here.

The PRO version expands the capabilities of the basic version, improving most metrics, including:

• Improving Return/DD from 7 to 13 in the PRO version

• Winrate from 63% to nearly 70%

• Decreasing capital exposure from 21% to 13%
  

The PRO strategy has exactly the same day-of-the-month conditions as the basic version, but it differs in two elements. In this article, we will show the differences in the results of both versions.

Analysis of trading strategy

Backtest 1, Fixed $ Money Management

In this scenario, we are investing a constant amount of $100k.

We are testing the period of the last 21 years from April 2003 to May 2024.

• Invested capital: $100,000

• Tested period in years: 21

• Tested Instrument: EEM

Equity Chart for this test:

Test results:

Year-over-year and month-over-month results:

The average annual return was about 10%, using capital for only 13% of the time.

Backtest 2, % Money Management

In this backtest, we invest in a strategy that constantly uses 100% of the current capital (starting with $100'000). This means that as the capital grows or decreases, the position value changes proportionally. The rest of the parameters remain unchanged.

The Equity Chart for this test looks as follows:

Basic statistics resulting from the test:

Additional information about the strategy

Net Profit and CAGR

The net profit above $589'000 in the tested strategy is lower than the Benchmark (Buy & Hold SPY marked in yellow on the chart), which is above $746'000, translating to a CAGR of 9.63% vs 10.70%. This means that the tested strategy achieved a lower net profit and slightly lower average annual return.

Drawdown and Return/Drawdown Ratio

The Max Drawdown was 9.55% vs 55% in the benchmark, resulting in a significantly better Return/Drawdown ratio of 13.16 vs 4.1. This indicates that the tested strategy was less risky and more stable.

Exposure

The exposure was only 13% vs 100% in the benchmark. A very low exposure is one of the biggest advantages of the PRO strategy. Click for more about exposure.

Winning Percent

The winning percent was close to 70%. This level of profitable trades provides a high level of psychological comfort regarding the frequency of profit generation.

SL & TP

The strategy does not use typical stop loss and take profit levels, although there are no obstacles to implementing them. According to our tests, for most ETF/stock strategies, these settings worsen results. Instead, the strategy has one exit signal or additional safety exit after X bars (time-based stop loss). Diversification within the portfolio of various strategies serves as protection against the strong impact of a potential price change in a single stock on the entire portfolio. Go to the stop loss order page.

Market Regime

The strategy has been tested in all basic market regimes and includes filters implemented based on this analysis.

Trading Costs

Trading costs and slippage were taken into account in the backtests, which occurred in real account tests for the Alpaca broker (detailed study). With a diversified portfolio of stocks and strategies, transaction costs can determine your profit or loss, so take the time to thoroughly test and choose a broker.

Robustness

The number of historical transactions, 180, is significantly lower than Stockpicker-type strategies, which can provide even over 100'000 transactions in robustness tests.

The strategy has few rules, generally 2 entry rules and one exit rule. We adhere to the principle that the fewer parameters, the greater the strategy's robustness. Therefore, we make an effort for our strategies to have as few parameters as possible and to select only those parameters that have a significant impact on the strategy's effectiveness while also aligning with its character.

Recommended Instruments

The recommended primary instrument for this strategy in Algocloud is EEM however also good results can be achieved eg. in VWO.

Pattern Day Trader

The strategy does not close transactions on the same day, so it does not meet the Pattern Day Trader (PDT) criteria. This means that a real account is not required for the entire portfolio of at least $25k.

Correlation with Other Strategies

Take a detailed look at correlations here. Generally, the strategy has low correlation, which is a significant advantage. Go to the correlation page.

Summary - strengths and weaknesses of the strategy

Let's compare the PRO version vs. FREE (MM%):

The PRO strategy achieved a lower total monetary result by $90k, yet we rate it higher because it offers:

• a higher Winrate (almost 70% vs 62.5%)

• a lower drawdown and therefore an almost 2x better Return/DD ratio

• lower exposure, i.e. 13% instead of 21%. This allows the same capital to be used at the end of the month for other strategies.
  

Strengths of the PRO strategy:

• Low capital commitment: The strategy offers very low capital commitment with an exposure of 13% vs the benchmark's 100%, meaning it could be successfully used in a portfolio alongside other strategies.

• Profit stability: The CAGR was 9.63%, slightly lower than the benchmark's 10.70%.

• Low Drawdown: The max drawdown in the strategy was 9.55% compared to 55.20% in the benchmark. This shows that the short exposure time translates to much lower risk, making the strategy less risky and quite stable.

• High Winning Percent ratio: 69.5% of transactions ended in profit, highlighting the effectiveness and psychological comfort of using the strategy.

• Low correlation: The strategy is relatively uncorrelated with others.

• Percentage of same-day closed transactions: All transactions are closed within a few days, so there is no risk of violating Pattern Day Trader rules.
  

Weaknesses of the strategy:

• Robustness: The strategy has significantly fewer transactions than Stockpicker-type strategies, which can be seen as a disadvantage in terms of robustness. Therefore, the strategy requires incorporation into a portfolio of diverse strategies with higher robustness.
  

Emerging Markets can experience much stronger growth than the US market in certain periods. Therefore, it is worth having exposure to these markets as well. As shown, holding this ETF for the entire month is not effective. By using capital for only 10-20% of the time (depending on the strategy), very good results can be achieved without exposing oneself to large fluctuations.

I personally use the PRO strategy in my portfolio every month, but the decision on whether to use it is up to you!

What you receive in the package for this strategy:

• The ebook presents detailed rules and results for the strategy.

• SQX file ready to be used on the Algocloud and StrategyQuant platforms.

• Pseudocode that describes all the rules in an easy-to-understand way.

  
  

If you need the strategy code in formats such as MultiCharts, MT4, or MT5 (MQL), please contact us regarding this matter.