The other day a friend asked me that if he time traveled 100 years into the future what trading system for stocks would still be working?I thought I would go ahead and share what I came up with.
Trend Following Comes to Mind...but There's a Better System
The reason markets exist is because price moves around.
If prices did not move, you would not need a market.
Money likes to chase performance (or run from bad performance!)
When you have something that is going up, it tends to keep going up.
Like this system tested all the way back to 1920 demonstrates.
If it is going down, it tends to keep going down.
Remember the Nasdaq in the late 90’s, more rising price, added performance attracted more and more money.
Then it was bonds, then stocks again...etc.
Money keeps rotating from one asset to another.
A Trading System for Stocks Part 1: Focus on Many Liquid Assets
Let me give you some simple tips that I think you can use in your trading right now.
You do not actually have to go to the future to start doing this.
One simple filter for success would be to focus on many asset classes.
This is one that is really important and luckily, these days we have ETFs.
One thing about stocks is they are mostly correlated to each other.
They are all doing the same damn thing at the same time.
Even great stocks like apple can crater and lose 50% of their value or more.
We don't want that.
So, lets go ahead say we only want to trade ETFs that are really liquid and stay away from individual stocks.
There is the S&P 500 which is the biggest market in the world and extremely liquid.
Then you have United States treasury bonds, also extremely liquid.
And gold is another extremely liquid assets class.
A Trading System of Stocks Part 1: Focus on Bull Markets
The best performing asset that are in a bullish configuration are above their 200-day moving average.
When you see an asset drop below its 200-day moving average you want to get the hell out of that market.
That way you're not going to experience one of those 70% drops like in 2008-2009
A lot of times, the best performing assets, they continue to up perform until they go buzz.
There is no paradigm out there that says something has to go up forever.
By the way, if you lose 70% of your portfolio, it takes a 330% gain to recover.
That is no joke.
There are a lot of other ways you can figure this whole thing out, but I think this is going to work.
Keep things simple; it usually works pretty well.
So What Will Work in the Future?
Because money chases performance you want to be in bull markets.
You can determine if a market is in a bullish configuration if it is above its 200-day moving average.
You also want to hold different types of assets that are extremely liquid.
ETFs make this super easy and they are here to stay.
Combining these two parts into a rotational strategy is the key.
Once a month you want to analyze your holding, making sure they are still bullish.
If they aren't, sell them and buy the next best stuff out there!
If You Are Sent to the Future Use This
I hope this helps you out in your focus.
You should be looking at multiple markets and make sure they are liquid markets.
You do not want to go through that the same baloney that happened back in 2008.
Suddenly everyone realized that there were tons of markets that were totally illiquid.
You also want to concentrate on bull markets.
There is always going to be a bull market in something - you just need a proven system to find bull markets year around - like this one.
Those are the two main tips that I wanted to give you today.
Hope it helps!