Traders often find themselves losing consistently in the stock market because it is too volatile, making them feel anxious as everything keeps changing every few seconds. Traditional strategies in terms of buy and hold can result in frustration, thus increasing uncertainty.
In this article, we are going to analyze an unusual trading strategy which relies on a particular trading day of the month using historical patterns to outperform traditional approaches to investment. It has been proven for the past 60 years to be quite effective and an alternative for standard methods.
Perhaps you could enhance the return on investments and expose it to less market volatility through the implementation of the “Trading A Few Days a Month” strategy. Let’s dig deeper into more information about this strategy and how it has continuously beaten the returns from buy-and-hold.
What is the Strategy?
The strategy is based on a common cyclical pattern of the behavior of the stock market-the stocks tend to move up on the last days of the month and the first days of the new month. Some possible reasons for such cyclical behavior are at the end of the month rebalancing of portfolios, capital inflow due to people joining the market among other things.
Trading Rules
To exploit this cyclic behavior, the trading rules are simple:
- Buy on the fifth last trading day of the month
This is when the rally starts. - Sell on the third trading day of the new month
This is when you cash in on the early-month rally.
Charting the Strategy
The timing of the trades is presented below:
- Green Arrow: This is set at the fifth last trading day to show a buy signal.
- Blue Line: This is an indicator of the first day that the month has experienced a trade.
- Red Arrow: This indicates selling at the third day when trading begins.
Due to such time accuracy, an investor can take participation in the market to ideal times for more potential yields.
Performance Metrics
Let us proceed to understand how well this strategy performs compared to the simple buy-and-hold strategy.
Equity Curve
This equity curve almost shows a very smooth increase in an upward direction with no swing like that buy-and-hold strategy in which the equity curve must be pretty irregular because there are a lot of draws down, therefore more risk.
Annual Outcomes
- Annual performance: It has delivered the 7% on an annual performance, performing better than the 6.9% yearly result achieved by the buy and hold approach.
- Investment Time: This strategy invests only 33% of the time. So, actually most of the trade time is on a sideline. Thus it has minimized exposure to the market.
Drawdowns
- Drawdown comparison: The maximum draw-down of this strategy is found to be 27%. Compare to buy-and-hold; the maximum draw-down it has shown is a massive 56%. That’s an enormous difference in the terms of draw-downs and speaks to the proper risk management of the strategy.
Visual comparison
To understand this success better, let’s compare the following:
- Red Line: This is the trading strategy. You can see a much smoother ride with fewer fluctuations.
- Buy-and-Hold Line: This line highlights the volatility and bigger drawdowns that accompany staying fully invested.
It is visually obvious why a strategy based on historical timing is better.
Strategy Improvements
Although the original strategy gives decent returns, the strategy could be improved by fine-tuning the trading rules so that it does better than the original version.
Improved Trading Rules
The new strategy cuts market time to 33% to 23%, while holding a competitive edge in an annual return of 6.7%.
Subscription Access
We reserve this fine-tuned trade rule details to our paying members alone. Because for a small fee where we pay to have this monthly strategy update, our subscribers lead the markets where their trading techniques are good and effective.#
The “Trading A Few Days a Month” strategy is unique and proven in its ability to navigate the stock market. Focusing on specific trading days, the strategy has outperformed the traditional buy-and-hold investments over the last 60 years.
This strategy entails a pretty aggressive annual yield of 7%, limited drawdown, and can potentially spend most the time trading, so attractive for newbie or seasoned investors.
Try this strategy if you need a reliable way to improve your investment portfolio. To learn more about optimizing trading techniques, tune in for our next video on swing strategies where we will share five more strategies that can further upscale your trading game. Happy trading!