March 25, 2017: New comments S&P500
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Part of good money management with BBS is to use a limited selection of stocks. With a fixed, limited number of stocks it is easy to follow up the charts.
This limited selection of stocks receives an evenly distributed starting capital. Each stock will be traded individually with no profit or loss sharing with the other stocks in portfolio. This means that each stock must be handled individually, because it must only use its own private capital.
Applying this kind of money management is very effective and has a number of advantages:
Bad performing stocks will be recognized much faster. That way they can be replaced much sooner or in the worst case they are not in the race anymore because there is no capital left.
If you are looking for more profit, you can make use of a margin account. If we run the same test as before with the 42 stocks over the period August 2004 till beginning of April 2011, with a 100% margin, BBS makes a profit of 723% with an average of 43 trades per stock. Compare this to the 352% profit not using any margin.
If using a margin account, do not use a margin greater than 100%. Be aware that you are investing double the money you have!
In the chart you can see the simple rule to open and close a long position based on BBS.
Beginning of March the closing price breaks through the upper side of the BBS channel. Time to open a long trade.
Until the end of June the closing price remains above the lower side of the BBS channel, but then breaks the lower side with a closing price. Time to close the long trade.
In the next chart you can see the rules to open and close a short position based on BBS.
Beginning of May the closing price is moving below the lower BBS band AND the closing price is below the 165 day simple moving average (red curve). Time to open a short trade.
Until the second half of June the closing price remains below the upper side of the BBS channel, but then breaks the upper side with a closing price. Time to close the short trade and open a new long trade.