Quarterly Trading Strategy (Rules, Backtest, Performance)

Today, we show you the performance data of a quarterly trading strategy that boasts substantially better risk-adjusted returns than buy and hold: 

Buy and hold returns 7.2%, while our quarterly trading strategy compounds at 9.8% if we adjust for much less time invested compared to buy and hold. 

We remind you today’s backtest is just one of thousands we have done, so please check out our landing page of almost unlimited trading strategies

Let’s jump to our quarterly trading strategy (for stocks):

Quarterly trading strategy – trading rules

We are making it simple, and we make the following trading rules for our quarterly strategy:

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Let’s find out how our quarterly trading strategy performed:

Quarterly trading strategy – backtest results and performance

The quarterly strategy works best for assets that trend over the long term, and stocks are one of them. 

Thus, we backtest S&P 500. 

Below is the performance of the cash index of a 100 000 investment in 1960 until today (the cash index does not consider any dividends payments, and thus underestimates the return):

Quarterly earnings trading strategy
Quarterly earnings trading strategy

You end up with 5.3 million today, which is a compounding rate of 6.4%. For comparison, buy and hold returned 7.2%. 

You might argue the strategy is worse than buy and hold (and it is if we only look at returns), but you have to consider that you are invested only 65% of the time, meaning your capital is on the sidelines 35% of the time. We have not considered any interest on idle capital, but it would have been a significant amount and improved the strategy.

However, our strategy is much better than buy and hold we look at risk-adjusted returns: 

If we divide the return of the strategy with the market exposure, we can call it risk adjusted return (6.4/0.65), we get a risk adjusted return of 9.81, which is significantly more than buy and hold.   

Moreover, the quarterly trading strategy has substantial lower max drawdown at 30% compared to buy and hold’s 55%. This is an important trading metric because most investors tolerate a lot less pain than they imagine. If you can’t tolerate losses, you are more likely to fold in a drawdown.

Let’s switch the trading rules we listed above and only take trades when the quarterly performance of S&P 500 are negative:

As you can see, the performance is a lot more erratic. Hence, our quarterly trading strategy performs pretty well with our very simple price and momentum filter. 

Quarterly results trading strategy

Most readers are hopefully aware that listed companies publish quarterly earnings. 

We have in a previous article published an earnings trading strategy that is based on these quarterly earnings.

What is a quarter?

A quarter is a 3-month period in a year.

The four quarters of the year are typically referred to as Q1 (first quarter), Q2 (second quarter), Q3 (third quarter), and Q4 (fourth quarter).


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