The Techno-Funda way of Investing

For long, a concept that has gained some amount of acceptance is that by selecting stocks using a combination of Technical Analysis and Fundamental Analysis, one might be able to get much better returns compared to using either of them on a standalone basis.

I myself long back believed in such a thing to the extent that I even created a new yahoo group where I felt we could have these kind of discussions. Since I am due to give a talk to a group of friends at a Value Investing club, I decided that rather than just claim that mixing up the two would be profitable, why not test out the theory and see the results.

For the test, I chose the current set of CNX 500 components (a total of around 495 stocks). I did not run and use the output from a fundamental screen such as say the “Magic Formula Investing” simply due to non availability of the stocks that would have got chosen in 2000 (Start of Test).

I used 3 different scenario’s. In Scenario 1, I just bought 1 share each of all the companies whenever I got a signal. If that trade went into a loss (max loss of 20% from purchase price), it did not alter my position size which was kept the same for the next trade as well. Maximum Capital I envisaged that would be required, 200K.

In Scenario 2, I bought the max quantity that would be allowed based on a initial capital of 10K for each stock. If the stock had a loss trade, the next trade would have a lower quantity based on the capital left in that stocks’ account. Only Max stop of 20% from the purchase price was used.

In Scenario 3, I bought the max quantity that would be allowed based on a initial capital of 10K for each stock. If the stock had a loss trade, the next trade would have a lower quantity based on the capital left in that stocks’ account. Along with max stop loss, I also used a trailing stop of 20% from the high point it had reached.

Buy & Hold was simply buying on the first trading day and selling on the last.

The time period for all the above tests was from 1st Jan 2000 to 31st December 2014

Here are the results (Click on the image for a bigger picture)

Scen

As can be seen, Scenario 2 / Logic 2 was the best performer. Of course, the results have to be taken with a fist of salt since the stocks I used for this test were those that had survived and are currently part of the CNX 500. But since the whole test is to compare B&H vs using Technical’s, I feel that the same can be safely ignored.

What surprised me was the huge difference between the system that used Trailing stop and one that did not. I am not a strong believer of using stops since market volatility can easily take the best placed stops out, but this result was a revelation as to the damage it can create in long term. Then again, its not only psychologically tough but also makes one look stupid as well to buy a stock at 100, see it move to 1000 before getting stopped out at 80. Maybe, one needs to look at a middle path, something I hope to explore in a future blog post of mine.

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About Prashanth

Have been a full time participant in the stock markets since 1996. Run a Yahoo Group where focus is exclusively on discussions of the Indian Markets using Technical Analysis as the tool (groups.yahoo.com/group/technical-investor)
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9 Responses to The Techno-Funda way of Investing

  1. C K Narayan says:

    Prashant,
    Don’t you think the gains in Logic 2 over B&H is not really significant? Meaning, not sufficient gains accrued to justify the extra efforts and costs?
    Doc

    • Prashanth says:

      Very true Sir. It just abut passes the bar though one small mistake and the pass becomes a fail.

      Over a long time, my testing has been to try and see as to whether we can using technical rules beat a B&H which is the simplest form of investing and the answer (at least using most of the normal known technical parameters) is a big NO 😦

      Take any bluechip stock that one believes has potential for future growth (say ITC/ Hindustan Lever / MRF / Eicher Motors) ans has delivered strong growth over the years. No matter, what technical rule is applied, the risk of getting way less than what an ordinary investor can is pretty large.

      Of course, the big advantage of using technical rules is the supposed lower draw-down that we see compared to B&H. But when faced with a series of losses (Losing streaks), is not the psychological feel as bad as when one encounters a big bad draw-down like the one seen in 2008?

      Based on my testing, I have more or less come to the belief that if a system is not able to generate greater than 2x the returns of B&H, it would be something that is not actually worthwhile due to the fact that we assume a lot of factors in back-test which may seldom be true in real trading.

      For example, many traders prefer to have very small or Nil positions before major events but many a time, its these events that provide us the outlier profit and without that one trade, the whole equation changes dramatically.

      Would love you hear your thoughts on the same, either as a comment here or as a blog post on your site. Thanks a lot πŸ™‚

  2. hey Prashant can’t agree more with your above reply to a comment. I use technical analyses on special situations only. Like a sudden fall from grace cases (case in point sah petroleum, mcx) where i catch a falling knife with my pivots system and ride the trend with ATR multiple based trailing stop. The beauty is, if I am wrong, i have a fixed % exit in mind, If i m right, trend can take me anywhere it wants. Also works in Spin off situations. (gulfoil lub, orient cem and paper, Intellect)

    Besides this using technicals is rather ridiculous, u cannot go far in life thinking companies as lines on your graph. These are unfolding stories with real earnings for god’s sake.

    check out my presentation I gave at IIF 2014, feel free to use any component for your upcoming stint.
    Manish Dhawan
    http://www.mysticwealth.in
    9899176304

  3. Anish says:

    Hi prashanth, out of curiosity what technical parameters were you using to trigger the buy and sell signal?

    Thanks
    Anish

    • Prashanth says:

      Buy a Cross above its 60 day high. Sell, a close below 20% (max) from the purchase price or 20% from the highest close (if I used Trailing). All trades, Long only

  4. Anish says:

    thanks. i have also backtested a techno-funda combo using a screener and weekly prices. conclusion remains the same. the buy and hold will have have far deeper drawdown,. while the techno-funda may have similar or slightly better returns with lower drawdowns. but if we factor in slippages and effort etc. it may turn out to be the same. however, having a lower drawdown for me personally is a big plus. but then it depends on each persons risk tolerating ability.

  5. Karan Bhalla says:

    Thanks for sharing :), well there are a some studies that beat a buy and hold (vs. S&P)..however, we do not have many sector specific ETF’s which most of the studies use. (and not much liquidity in the currently available ones i guess). Below are few links i came across, but what i realized was that most of these studies have one recurring theme… relative strength. I guess it would be possible to build a portfolio using stocks instead of sector ETF’s (since we dont have much)..that would be an interesting study :). ..alas, its a never ending search for the holy grail of trading πŸ™‚ . Thanks again.

    http://www.optimalmomentum.com/trackrecord4.html

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

    • Prashanth says:

      Hi,

      Yep. RS is a interesting strategy to use for building a portfolio. Am currently testing a idea on the same using a concept brought out by Dorsey Wright. Too much of work though 😦

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