Maximum Value, Minimum Risk

When I trade, I am always looking for a combination of Maximum Value and Minimum Risk. That means not only making profitable trades, but also protecting my downside against loss and being in cash as much as possible.

This morning  I tested several DOW 30 stocks using my Touch SMA strategy. (See here, here, here and here for other studies I’ve already published.) In about half of the stocks, Buy & Hold outperformed Touch SMA. 

Here’s an example:

I tested Caterpillar (CAT) using my Touch SMA strategy.  The optimal strategy I found grew the portfolio about 40% since March 2009. In comparison, Buy & Hold would have grown it almost 60%. That’s a ton better.

But look deeper:

Touch SMA was in the market only 442 out of possible 1962 days. The P&L per day was a little over $31 for Touch SMA compared to just over $8 per day for Buy & Hold. The maximum drawdown on Buy & Hold was almost 39% compared to a max drawdown of 10% for Touch SMA.

There is no clear winner here. If you prefer making more money while taking bigger risks, then Buy & Hold would’ve been the right strategy in CAT the last 5 years. The upside is a 60% gain in value. The downside is that your money was tied up 100% of the time and you suffered a 39% drawdown.

But Touch SMA, while not generating the same profits, was in the market only about 20% as long as Buy & Hold, which means that money could have been put to use in other trades as well.

I don’t trust the market, I don’t trust my emotions, and I don’t trust the past. But I do trust systems that are built to protect my war-chest and slowly, consistently collect profits. Touch SMA is proving to both protect and profit.