“The first step in the Risk Management Process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.” Charles Tremper
HOW TO USE TRENDING STOCKS TO IMPLEMENT A TREND FOLLOWING STRATEGY
We have been asked by numerous Members to provide some case studies so they can learn how to better use the Trend Following strategy and the Trending Stocks tools.
Here is the second of the series.
The Trend Following Investment strategy has been around for several hundred years going back to at least 1838 to legendary economist, David Ricardo.
We became familiar with Trend Following after experiencing big losses in 2000 when the dot com bubble burst and again in 2008 when the Financial Crisis occurred.
Eventually, we developed Trending Stocks to make it easy for other investors like ourselves to use this strategy without all the complex charting.
“The Trend” features Sarepta Therapeutics, Inc.
Incorporated in 1980, Sarepta Therapeutics, Inc. (SRPT) is “a commercial-stage biopharmaceutical company, focused on the discovery and development of RNA-targeted therapeutics, gene therapies, and other genetic therapeutic modalities for the treatment of rare diseases.”
In this case study, we are using the Trend Following strategy and Trending Stocks methodology.
We have 2 investors who both want to hold this stock for the long term due to its focus on saving the lives of those with rare diseases.
However, Investor TF uses a Trend Following approach while Investor BH follows a Traditional Buy / Hold approach.
Here is the 5-Year Graph of Sarepta’s Stock Market Results. As you can see SRPT has some had some very significant swings over that timeframe.
Here is a brief explanation of the Bar Chart below:
The horizontal numbers are not dates. They represent Buy / Sell Events by Investor TF who is following the Trend.
Both investor TF and BH buy 100 shares on the same day for the same price, $87.81.
Number 1 on this chart is April 1, 2018, the beginning of the Trend. Both investors made their first purchase at Event Number 2.
Number 17 is date where the stock is currently as of Friday, March 3, 2023.
Price per Share Buy/Sell Events 2018-2023
Let’s see how both Investors did over the 5 year period.
Investor BH is a traditional Buy / Hold investor who makes a single, 100 share purchase at Number 1 and continues to hold for the entire 5 year period -Number 17.
BH does not utilize a Stop Loss since there is no intention to Sell.
Investor TF practices Trend Following using Trending Stocks based on the following rules:
1. After each Buy, TF sets a Trailing Stop Loss, in this case at 15% below purchase price. (This amount will vary depending on the individual stock’s volatility.)
2. As the price of the stock moves up, the Trailing Stop Loss will also move up and continue to be 15% below the new price.
3. When the stock price drops below 15% from its high, the Stop Loss will automatically generate a Sell Order. TF has taken the emotion out of process!
The Trailing Stop Loss is a critical component of Risk Management.
4. TF will re-buy the stock when the price has risen 15% above the latest low.
5. Continue this process.
If the new purchase price is lower than the price the stock was sold at, TF is able to buy additional shares of the stock. This is very important as you will see.
Both investors bought 100 shares at $87.81 for an initial investment of $8,781.00.
As of today, BH finished the 5 year period with 100 shares worth $156.61 per share for a total of $15, 661.00. A gain of $6,880 or 78%! Very nice!
And how did TF, who also wanted to be invested in SRPT over the long term but follow a Trend Following strategy, do?
Remember, due to Sarepta Therapeutics volatility, TF’s Trailing Stop Loss sold every time the stock price went down 15% and TF bought back in when the stock price came back from its low by 15%.
As a result, TF sold and repurchased the stock 7 times over the 5-year period!
This table shows TF’s activity :
Column 1 = Buy or Sell Events Over 5 Years; Column 2 = Price/Share; Column 3 = Number of Shares; Column 4 = Total Value of Shares
All of the Even Numbers indicate Buy Events and the Odd Numbers indicate Sell Events.
TABLE SHOWING TF’S BUY / SELL EVENTS
Because of reductions in the stock price when the stock took a dip, TF accumulated more shares when repurchasing.
There were times when the new purchase price was higher than the sell price – see Event 4 & 5 and 6 & 7.
Even with that TF had a final total of 228 shares, 128 more shares than BH!
Two investors want to invest in the same company and want to own it for the long term. They start at the same time with the same amount of money.
At the end of 5 years –
Investor BH, who invested $8,871.00, has 100 shares at $156.61 or $15,661.00 for a $6,880.00
Investor TF, who also invested $8,871.00, has 228 shares at $156.61 or $35,707.08 for a gain of $26,926.08!! Yes, you read that number right.
This does not happen in every case. Sometimes the gains are smaller. Sometimes they are negative and sometimes they are even larger.
In our real life example, TF had set a sell based on the stock’s recent volatility and TF’s risk tolerance. This is designed to remove or at least reduce the emotion of making sell decisions at inopportune times.
Those that utilize a Trend Following strategy also buy and hold – as long as the stock is trending!
Managing risk is critical to keep the losses small and ride the winners until the Trend fades.
At Trending Stocks, we believe the Trend Following strategy to be very powerful. We endeavor to develop the tools to make it accessible and easy to use for the individual investor.
We continue to enhance the tools and features on the Trending Stocks Dashboard.
We have added 3 new Detailed Search capabilities: the S&P 500, Nasdaq 100 and Russell 2000.
Coming soon – Bar charts!
Do you know someone who could benefit from our Trending Stocks research and the Dashboard tools? Forward this email to them and let them know about the 4 Week FREE tria
In the coming weeks and months we will be expanding the ETF coverage.
And don’t forget to Ride Your Winners and Cut Your Losses!
Be sure to watch for our Trend Tidbits and next Month’s The Trend!
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