This page is a guide to using this system. It describes the system, illustrates example trades, answers frequently asked questions (please ask me if your questions were not answered here and I'll add this information in a future update), and provides the complete mathematical algorithm, so that you have full disclosure what you are getting into and can make an informed decision before jumping in.
The Trading Systems Group Swing Trading System (TSG-STS) is a swing and position-based trading system that provides specific instructions to incrementally buy equities as they decrease in price and to sell them as they increase in price. Trades will close out with profits as fast as 1 day or as slow as several years. It is contrarian system in the sense that it buys when a stock is trending down, and sells when it is trending up. A "free shares" permanent portfolio component is included as a feature to the system that keeps shares that are completely earned with trade profits and builds over time. The "free shares" also performs the function of providing a container for dividends to accumulate
The system instructs the end user to exponentially average down purchases: 1st buy is $500, 2nd buy is $1,000, 3rd buy is $2,000, 4th buy is $4,000, 5th buy is $8,000, and 6th buy is $16,000, with a stop loss set only if a 6th buy occurs. In most cases, a trade cycle rarely gets beyond the 3rd or 4th buy, and by design, the screening process focuses on weeding out high risk equities that would require large buys. The system in its presented form is intended for those with large $100K+ trading accounts. Those with smaller accounts may choose to alter the system to their needs; potential suggestions on how to do this are presented on this guide page.
Equities are backtested over 10 years and forward tested in real-time to determine the optimal purchase prices and to determine the most profitable sell targets. The system screens out equities that do not have at least 10 years of historical data available. Leveraged (2x or 3x) funds are also not included. The system only looks at equities with market caps over $10 billion dollars or well established Exchange Traded Funds (ETF's). The method of backtesting and forward testing is the same method presented in the algorithm. After running through the algorith over a 10 year period and at least 1 cycle of forward testing, scores are assigned to each equity. A risk score, which is a measure of how much would need to be invested; a reward score, which is a measure of how much profit an equity can create; a consistency score, which is a measure of how fast an equity exits a trade; and finally a composite score of all 3 of these. If an equity scores too low in any category or scores a low composite score, it fails the test and is not traded by the system.
This is the chart for ticker SCHW and a simple illustration of how the system would trade it.
This is what the orders would have done in a trading account:
|B1||21-Aug-2015||BOUGHT 16 SHARES $31.81|
|B2||24-Aug-2015||BOUGHT 36 SHARES $28.44|
|S1||9-Sep-2015||SOLD 17 SHARES $31.47, DEPOSIT 1 SHARE||$23.07|
|B2H||22-Sep-2015||BOUGHT 18 SHARES $28.44|
|S1||2-Nov-2015||SOLD 17 SHARES $31.28, DEPOSIT 1 SHARE||$19.84|
|B2H||11-Jan-2016||BOUGHT 18 SHARES $28.44|
|B3||20-Jan-2016||BOUGHT 80 SHARES $25.00|
|S1||4-Mar-2016||SOLD 38 SHARES $27.50, DEPOSIT 2 SHARES||$45.00|
|B3H||27-Jun-2016||BOUGHT 40 SHARES $25.00|
|S1||18-Jul-2016||SOLD 38 SHARES $27.60, DEPOSIT 2 SHARES||$48.80|
|SA||10-Nov-2016||SOLD 75 SHARES $34.39, DEPOSIT 17 SHARES||$48.33|
|FREE SHARES: 23|
|TOTAL CASH PROFIT: $185.04|
So in short, the system had $185.04 cash profits, and 23 shares for "free", which will remain in a permanent portfolio and gain dividends and value over time. In addition, dividends were earned during the trade cycle as well, but were not account for to simplify this example. Note that at the end of the trading cycle, the "free shares" were worth 23 X $34.49 = $790.97 So total profits were $790.97 + $185.04 = $976.01. This was over a 15 month period with 1 equity. The premise of this system is to do this with hundreds of equities over and over and over.
The complete algorithm for this system is as follows. Note that you do not need to study this algorithm to use this system. The limit orders to set for each day are already provided.
Well, reading through that, it looks quite complicated. Basically, what the system does in simple terms is this: 1st buy on initial pullback percentage of $500 worth of a stock. Next step, either sell that $500 worth at a specified sell target percentage or buy another $1000 at further specified pullback. Then either buys $2000 worth on further pullback, or sells half of the previous buy 1/2 * $1000 = $500 worth. Then $4000, $8000, $16000, same deal. Profits are taken as "free shares" instead of money if the profits exceed the share price minus a $20 buffer. The key to the system is the pullback and sell target percentages, which vary depending on the equity in question. How are these determined? By running each equity through the algorithm using historical and real time data (backtested and forward tested) and assigning Risk, Reward, and Consistency scores, along with an overall score. A sensitivity analysis is performed to determine if a 5% pullback works better than a 25% pullback, etc. Ok, sounds cumbersome, but luckily all these calculations are automated by spreadsheet programs in google sheets.
The TSG-STS is specifically designed to be used with large accounts ($100K+), but what if you want to use the system with a small account? A few suggestions are provided here that may help you tailor the sytem to your specific needs. Use one or as many combinations of these suggestions as you wish:
The free shares portfolio serves 2 purposes. It provides a container for dividend collection and it provides long term capital gains for the portfolio. One might suppose it also provides "emotional" confidence in the system if say you have $20K-$50K in the free shares portfolio, it provides a tangible value that you can see. It is essential for the overall goal of the system to reach $1 Million after 10 years. Of course, one may tailor the system to thier own needs and goals and forego the free shares portfolio portion of the system.
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