This simple trading strategy has a 4x return over the broader market
Here is a trading strategy that has been shown to significantly outperform the market, earning as much as four times the S&P 500 in five years.
These backtest results show the efficacy of this strategy.
Compared to the S&P 500, an ETF that tracks the broader market, this strategy earns more than 4 times as much.
Now, when seeing these results, you might say, “wait a minute; that looks like TQQQ, a leveraged ETF. Wouldn’t just buying and holding TQQQ yield me the same results?”
You would be wrong.
You can see that this strategy has a number of huge advantages over just buying and holding the leveraged ETF. For example:
- The percent gain is more for this strategy— this strategy earned 357% in the past 5 years while TQQQ gained 336% in the same time period
- Despite earning more, this strategy was also significantly less prone to drastic losses. This strategy’s max drawdown was 36%, compared to holding TQQQ’s max drawdown of 82%. Similarly, the average drawdown of this strategy was 7%, compared to holding TQQQ’s drawdown of 34%.
- This strategy also has a significantly higher sharpe ratio (0.77) and sortino ratio (0.89) compared to holding TQQQ (0.55 and 0.69 respectively)
Lastly, I want to call out that this strategy’s sharpe ratio and sortino ratio is better compared to the broader market as well.
While the max drawdown and average drawdown are roughly the same, the risk-adjusted returns and percent change for this strategy is better than buying and holding the broader market.
As we can see, there is strong evidence for my claims. I’m not making up that this strategy beats the market; I’m backing up my assertions with data.
Caveats for this strategy
With this, there are still a few important facts to keep in mind.
- This strategy does account for slippage, but does not account for taxes
- This strategy can be volatile and is not suitable for all investors
- This is not investment advice; always do your own research before making investing decision or consult a registered financial advisor
Disclaimer: even though this strategy has been shown to outperform the market in the past, there’s no guarantee that this strategy will continue to outperform the market in the future. Past performance is not necessarily predictive of future results.
How I performed this analysis?
This analysis comes from data from my algorithmic trading platform, NexusTrade.io.
The data for these backtests comes from trusted vendors. You could choose to replicate these results for free on NexusTrade, or use an excel sheet or a Python script to validate it.
These results are real. Now on to the strategy.
What is this “market-beating strategy”?
The great part about this strategy is that it doesn’t involve imaginary squiggly lines, nor do you have to stare at charts all day. It’s a long-term investing and trading strategy.
Here are the rules.
Let’s say you have a portfolio with $10,000.
The first rule (or strategy) is that you’re going to spend 50% of your buying power ($5,000 in this case) on TQQQ, regardless of the current price.
TQQQ is a leveraged ETF that tracks the NASDAQ, which holds some of our biggest tech stocks, including Nvidia, Apple, Microsoft, and Google. Because it’s leveraged, it’s extremely volatile. Our goal is to try to minimize this volatility while still reaping many of the benefits.
And, the volatility of TQQQ is highly intentional. If you were to just hold TQQQ, you would outperform the market when the market is bullish. However, during drawdowns, you’ll experience very significant losses.
Recall that buying and holding TQQQ lost as much as 80% from peak to trough. Many investors don’t have the psychological resilience to withstand such a devastating loss. Thus, we need ways to mitigate it.
After you’ve spent 50% of your buying power on TQQQ, you’re going to wait until one of two things happen:
You’re going to buy more when your TQQQ positions are down 20% and you haven’t bought TQQQ in 7+ days.
If the market happens to fall and your TQQQ positions lose 20% or more of their value, you’re going to spend another 50% of your buying power on TQQQ.
Thus, if you’ve started with $10,000, and you already spent $5000, then you’re going to spend another $2500 on TQQQ.
This will decrease your cost basis. 20% is a relatively large jump, and unless the market is in an absolute free fall, its unlikely that the market will fall too much more.
If it does, you’re going to repeat; anytime your average position change is less than 20%, you’ll buy another 50% of your current buying power. So next time, you’d buy another $1250, then $675, and so on and so forth.
When your positions are up 10%, and you haven’t sold in 30+ days you’ll sell 5% of your current positions
Alternatively, if your TQQQ positions are up 10% and you haven’t bought any TQQQ in the past 30 days, then you’re going to sell 5% of your position value.
If you were to implement these two rules, this would be your portfolio’s performance.
From the backtest, we can see that this portfolio does outperform the market, but is much more volatile. It has a higher drawdown and a lower risk-adjusted returns.
We can see where the strategy starts to break down. When the market falls in 2022, the portfolio lost all of its gains, and then some. This isn’t ideal. Once we’ve started becoming profitable, we want to maintain what we’ve earned.
So what if the rules were slightly augmented? What if, you were much more aggressive when your account balance was low and much more conservative when your account balance was high? Would that result in better gains?
Spoiler alert: yes it would.
Want to know the rest of the strategy? Clap and share this article for part two!
Thank you for reading! If you can’t wait for part two and want to know all 4 rules right now, you can check it out right now for free at NexusTrade.io!
You can also create, test, and deploy your own algorithmic trading strategies. Try it today!
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