BullDude’s Portfolios: Testing Phase

Before using any trading strategy using real money, in the real stock market, it is recommended to go through a first phase of observation / analysis and a second phase of testing.

Only after having tested it with virtual capital for a minimum time of at least 6 months and with satisfactory results in terms of return / risk is it advisable to move on to the third phase, that is to apply the strategy with real money, on the real stock market.

“Learn More From Failure Than Success”

I am the founder of BullDude.com and I am a Popular Investor on the eToro investment platform (nickname: @iEarnings) and manage more than $ 200,000 from around 300 investors.

Before deciding to use the strategy I am currently using on eToro, which allowed me to clearly outperform the S&P 500 index with a low risk, I went through the 3 phases mentioned above and which will be better described at the bottom of this article.

In particular, I had to go through 4 strategies that “on paper” seemed to be interesting, but which then during the test phase showed a series of critical issues, both in terms of risk and in terms of return. Having never passed the test phase, I never applied them with real money, but they served me a lot because by studying the various mistakes made and the various critical issues I was able to develop a better strategy.

“We learn wisdom from failure much more than from success. We often discover what will do, by finding out what will not do; and probably he who never made a mistake never made a discovery”

Samuel Smiles

Let’s test 5 new interesting strategies

Personally I am constantly looking for strategies that allow me to get better and better results, so I have observed / analyzed (phase 1) 5 different strategies that will be tested for the next 6 months (phase 2) here on BullDude.com. Updates on open and closed trades will be posted daily here on BullDude.com.

The strategies are different from each other and the main objective is that at least one of the five shows interesting results in terms of risk / return. As explained above, before deciding to apply the strategy I am currently using with real money, I went through 4 strategies with unsatisfactory results.

The strategies are very interesting, ranging from a strategy focused only on investment in recent IPOs (Initial-Public-Offering) to one focused only on companies that show business data such as Revenue and Net Income always growing in recent years, passing through a portfolio focused on small-caps, one on mid-large caps and one on companies that are showing greater strength in price growth. They will be better described below by specifying the relative level of risk.

We are talking about trading strategies, so there will be buy / sell operations often (NO intraday transactions will be made) which will be communicated in a daily article. Read more about the Portfolio Specifications in the “Rules of the 5 portfolios” section below. Then, every weekend a summary of the performance of the 5 portfolios under test will be published.

The precise criteria for opening positions will not be specified, but you will be updated every day on open and closed operations

BullDude.com Portfolios

In this section you will find some information on the 5 portfolios that will be tested, with the relative expected risk level:

“Greater Strength” Portfolio

Risk Level: Medium

The “Greater Strength” portfolio will only include companies that show significant strength in terms of price growth. This does not mean that the companies with the highest performances will be chosen, but those that show a greater ability to reach new highs in the short, medium and long term. There are no limits in terms of market capitalization, industry or sector.

“Growing Business Data” Portfolio

Risk Level: Medium

The “Growing Business Data” portfolio will only include companies that will show key business data in constant growth (Revenue and Net Income) in the medium to long term (last 5 years) and in the short term (last quarter). There are no limits in terms of market capitalization, industry or sector.

“Mid / Large-Cap” Portfolio

Risk Level: Medium

The “Mid / Large-Cap” portfolio will only contain companies with a market capitalization of more than $ 5 billion, with no limitations in terms of industry or sector.

“Small-Cap” Portfolio

Risk Level: High

The “Small-Cap” portfolio will only include companies with a market capitalization of less than $ 5 billion, with no industry or sector limitations. The level of risk assigned is high because often the smaller the size of a company, the greater the volatility and therefore the risk.

“IPOs” Portfolio

Risk Level: High

The “IPOs” portfolio will only include companies that have made the Initial-Public-Offering (IPO) no later than 3 years. There are no limits in terms of market capitalization, industry or sector.

It is assigned a high risk level because it can contain both companies that have a more limited risk such as those of large size (for example $ 50 billion) and companies that have just made the IPO and have a very low market value (for example of $ 300 million) and therefore often very volatile and risky.

Rules of the 5 portfolios

The 5 strategies will be applied using 5 different portfolios, each with the following characteristics:

  • $ 20,000 capital (virtual, it’s a test phase)
  • Each open position will occupy approximately 5% (max. 10%) of the portfolio (with some exceptions) and at least in the initial testing phase the maximum number of open positions in the portfolio will be limited to 20.
  • Positions will almost always be opened at the closing price of the trading session, while they will potentially be closed at any time during the trading session (all buy / sell operations will be communicated daily with an article here on bulldude.com usually 10 minutes after the trading session closes)
  • A small percentage of the portfolio may be made up of European stocks
  • The operations will be frequent, they are not portfolios built to remain static for the long term but to adapt to the continuous movements of the market. The operations may remain open for a period of time ranging from a few days to a few months.
  • No intraday transactions will be made (opening and closing of the same position within the same trading session)
  • No use of leverage

You will find daily updates on open and closed positions and the summary at the weekend in the specific sub-category by clicking on the button below starting from the close of the market on 31 August 2020.

The “Portfolio” feature on Investing.com, one of the leading financial information sites, will be used to carry out the tests.

Tests start date: 31st August 2020

This is a testing phase and it is strongly NOT recommended to replicate trades using a real money account

3 stages of a trading strategy

Let’s see what the 3 phases that lead to the application of a real money trading strategy refer to.

  • Observation / analysis

Regardless of the type of trading strategy you intend to use, a phase is required in which you analyze the data related to this strategy in terms of return and risk. At this stage, it is then necessary to establish the criteria for choosing a company and the relative timing (when the investment is made).

Furthermore, it is necessary to establish in advance the maximum amount that you decide to lose in each single operation (the so-called “Stop-Loss”) and the moment in which the position will be closed because it will be in profit (Take-Profit). Without forgetting the theme of risk management, but it is a more specific discourse that will not be dealt with in this article.

  • Test (at least 6 months)

When you have clear ideas on how to apply the strategy, and enough encouraging results from the analysis phase in terms of risk / return, you can proceed to the testing phase (a period of 6 months is recommended). In this phase you will have to use the strategy on one of the many sites that allow you to make transactions using real share prices, but investing “virtual” money, without the risk of losing real money.

Passing from this phase before investing real money directly is necessary because deciding how to apply a strategy on a theoretical level is completely different from doing it in the real stock market with real stock prices moving continuously (even if you use virtual capital).

This happens because a psychological aspect takes over (very limited compared to the phase that we will see later) which often refers to not respecting the rules that we have imposed on ourselves. A frequent situation is not respecting a stop-loss when the position has reached the maximum loss that we had set for ourselves because we think that the stock can recover, or be greedy and not close a position at the target profit we had set for ourselves. Situations that often lead to negative consequences.

  • Application of the strategy with real money

After having carried out a test phase and having realized that you are able to respect the rules of the strategy and that the same has reported excellent results, it is possible to apply the strategy using real capital. Regardless of the strategy, it is always advisable to invest a capital that you can afford to lose, or that even if you lose 100% of the capital your life does not suffer in terms of quality and economic security.

Unlike the previous phase, in this phase the psychological aspect will become more and more important, so it is important to remain disciplined and to precisely follow the methods of applying the strategy.

The information in this article is for informational purposes only and does not constitute investment advice.