Trading on a Daily Chart

If you have the possibility to follow up daily instead of a monthly basis, we can switch to a daily data chart.

The selected S&P500 trading period here is from October 2006 till November 2010, a period of 4 years. First we run a back test with SATS5 on the daily chart, not using any margin.

A buy and hold would suffer a loss of about 10%. SATS5 makes 28 trades of which 15 winning and 13 losing trades totaling a profit of 128%. That represents a compounding interest rate of 23% per year.

Now let’s take profit of using the margin account.

- The result with a 1.5 to 1 ratio with the same signals is 224%, almost double as much compared to not using any margin. Or a compounded interest rate of 33% per year.

- The result with a 2 to 1 ratio with the same signals is 350% or almost 3 times as much not using any margin. This amount gives you a compounded interest rate of 45% per year.

- The result with a 3 to 1 ratio with the same signals is 582% or almost 5 times as much not using any margin. This amount gives you a compounded interest rate of 60% per year.

- The result with a 4 to 1 ratio with the same signals is 1,120% or 9 times as much not using any margin. This amount gives you a compounded interest rate of 87% per year.

It is possible to use a margin up to 4 times your capital here because the drawback percentage suffered on a daily chart is much less than on a monthly chart. On the daily index chart this will be in the order of maximum 15% and most of the time much less.

A 4 to 1 ratio in this case seems to be about the absolute maximum risk you should take. Do not forget that when you get a margin call, most brokers will automatically close your trade!

Now imagine trading with a moderate 2 to 1 margin; making that 45% compounded interest rate per year and that you could repeat the same result over a period of 20 years?

A $10,000 today with a 45% compounded interest over 20 years gives an amount of $16,879,518. And in 50 years? It goes up to  $1,170,577,337,166.

 

Trading a single Stock

Do I here you say that you are still not happy with that? Still want a bit more?

OK! If you are willing to accept the risk, you could look for a single stock instead of trading the S&P500 index tracker (SPY).

Using a stock like “US Steel Corp” ticker symbol “X”, you can make more profit simply because the percent price moves in the same time period, or the daily volatility for this kind of stock, are much larger than the index moves.

We use the same test period as before, from October 2006 till November 2010, a period of 4 years.

We run a back test with SATS5 on the daily chart, not using any margin. We start with just $1,000.

A buy and hold would suffer a loss of 14%. SATS5 makes 26 trades of which 19 winning and 7 losing trades totaling a profit of $6,397 or 640%. That represents a compounding interest rate of 65% per year.

Now let’s take profit of using the margin account.

The result with a 1.5 to 1 ratio with the same signals is $13,550 or 1,355%, more than double as much compared to not using any margin. Or a compounded interest rate of 95% per year.

The result with a 2 to 1 ratio with the same signals is $21,893 or 2,190% or almost 4 times as much not using any margin. This amount gives you a compounded interest rate of 118% per year.

The result with a 3 to 1 ratio with the same signals is $33,608 or 3,360% or more than 5 times as much not using any margin. This amount gives you a compounded interest rate of 142% per year.

The result with a 4 to 1 ratio is less good because of one big drawdown in June 2008.

Because drawdowns here are larger than the ones you will see in an index, the margin you can use will be limited to 2 or maximum 3 to 1. A large drawback here can be in the order of up to 25%. I would advise to use maximum a 2 to 1 ratio. Also make sure there is always sufficient margin and again do not forget that when you get a margin call, most brokers will automatically close your trade!

Can you imagine trading here with a 2 to 1 margin, making that 118% compounded interest rate per year and that you could repeat the same result over a period of 20 years?

A $10,000 today with a 118% compounded interest over 20 years gives an amount of $58,766,506,252.

And in 50 years? $837,191,249,264,135,000,000.

Maybe you can still read this? Anyway, all the stock markets in the world will be too small for you!

IMPORTANT!

My advice is NOT to trade just one single stock. If you prefer to trade single stocks, you must trade a minimum of 5 different well diversified stocks.

Continue reading part4.

 

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