Single Stock Trading Strategy (Backtest)

Last Updated on November 13, 2022

Many people view stocks as a way to make money, and certainly, stock trading has become one of the most popular types of trading since the emergence of the Covid-19 pandemic and meme stocks. Even before then, its popularity among retail investors grew with the emergence of commission-free stock trading platforms, such as Robinhood. But what is a single stock trading strategy?

The single stock trading strategy is a method of trading whereby a trader trades only one stock at a time. That is, at any given point, the trader focuses all their energy on only one stock (say Tesla or Apple) and tries to learn and know everything about the stock’s fundamentals and technical analysis, which includes the factors that move the stock and the pattern of its price movement.

In this post, we take a look at the single stock trading strategy. We make a backtest at the end of the article.

What is a single stock?

A stock is a type of investment that represents an ownership share in a company. The unit of a stock is known as a “share.” A share of a stock entitles you to a proportion of the company’s assets and profits, and how many shares you own determines how much you get. That is, if you buy 150 shares of a company, you would own a portion of the company equivalent to the percentage the 150 shares offer you.

You buy and sell shares on an exchange where buyers and sellers trade them via stock brokers. In today’s world, this buying and selling are facilitated with electronic networks via trading platforms. There are two different ways to make money from stocks. One way is through the price appreciation of the stock, which is the main target of short-term traders (day traders and swing traders). The other way is to make money through dividends, which are the profits of the company paid to the shareholders.

Unlike trading EFTs, mutual funds, or a portfolio of stocks, some traders focus on trading individual stocks and may even choose to trade a single stock. For example, a trader may choose to trade only Apple, Amazon, or Tesla, as that would offer them the opportunity to learn and know everything about the stock’s fundamentals and the pattern of its price movement (technical analysis).

However, while individual stocks can have unlimited growth potential, they also have the potential for huge losses. The company can go bankrupt at any time, and the trader could very likely lose their entire investment. History has shown that even the biggest and apparently successful companies can become insolvent at any time. This is why trading a single stock can be very risky. As a result, most investors try to mitigate this risk by having a diversified portfolio of stocks, and many use tools like mutual funds, ETFs, managed accounts, or variable annuities to achieve this.

Nonetheless, some traders like to be specialists and focus all their attention on a single stock at a time. Such traders use the single stock trading strategy.

What is a single stock trading strategy?

The single stock trading strategy is a method of trading whereby a trader trades only one stock at a time. That is, at any given point, the trader focuses all their energy on only one stock (say Tesla or Apple) and tries to learn and know everything about the stock’s fundamentals and technical analysis, which includes the factors that move the stock and the pattern of its price movement.

With this type of trading, the trader studies whichever stock they have chosen and take a long or short position on the stock, as their trading strategy dictates. Their trading style could be day trading, swing trading, or even position trading, but they only trade that one stock they know about. If, for any reason, they ever want to switch to a new stock, they first study the new stock, switch to it, and trade only that stock.

As with any other stock trading strategy, there are different ways they can gain exposure to the stock they want to trade. One method is to trade the stock directly on the equity market through their broker, but for those who want to day-trade on the US equity market, the method is subject to the pattern day trading rule of the FINRA. Another way is to trade single stock futures if they have the capacity to do so. Some retail traders, especially outside the US, can trade the stock CFD. In the US, a new way to trade leveraged single stocks just came on board in July 2022 — single stock ETFs.

But the key thing in using the single stock trading strategy is to determine the stock to trade. Some of the factors to consider in choosing the right stock include:

  • Liquidity: The stock must have enough liquid, as measured by trading volume and number of transactions.
  • Volatility: The stock must have good volatility
  • Good price movements: The price must not be spiking about. It should have sizeable movements in any direction.
  • Trade setups: The stock chart must have whatever the trader considers a trade setup, and the setup must occur regularly and reasonably frequently.

Is buying single stock a good idea?

No, we don’t think it is a good idea to trade only one stock because of the risks involved. No matter how solid a company seems to be, it can become insolvent at any time for one reason or the other — poorly managed debt, a court case, or an issue with the regulators leading to the revocation of its license. Any of such issues can send the price to an abyss in no time.

Imagine having all your capital in one stock and it loses 90% of its value. Don’t even think that with the right knowledge, a trader that specializes in one stock can pick the signs before it happens. Any stock can tank at any time without any prior sign of company or industry hiccups — this is called a black swan event. And a stop loss order may not help as the price might gap far below the stop loss level.

The risks associated with trading a single stock are too many for any retail trader. Institutions and big funds which can have many different traders trading for them can choose to have a specific trader for each major stock who would focus only on the assigned stock, and that would be fine because all together, they have a diversified stock portfolio.

But a retail trader who trades all by himself would not be able to do that, so trading a single stock is a bad idea for retail traders. The thing for a retail trader, whether a discretionary or a systemic trader, is to trade different stocks and even trade other securities as well. This way, they can have a diversified portfolio and use diversification to manage risks.

Can you day-trade one stock only?

Yes, you can. In fact, some day traders do follow a single stock trading strategy to different degrees. There are those who specialize in only one stock and trade only that stock every day. On the other hand, there are those who have a universe of stocks they trade but select only one of them to trade each day. That is, the trader may have a universe of 20 stocks in their watchlist, and each day, they would select, out of those 20 stocks, only one stock that has the best trading setup and trade for the day.

Both methods can be limiting in many ways, as they can make scaling difficult, and if you try to scale by increasing position size, you may be exposing your capital to huge risks because anything can happen in the market at any time. Day-trading only one stock means that if the stock is hit hard by any market event or a bad actor, it can seriously affect your trading capital.

As we explained earlier, trading institutions can practice the single stock trading strategy with each of their traders and still end up with an overall diversified portfolio, but that is not possible for a retail trader. So, as a retail day trader, you are better off trading many stocks at a time as that would offer you a diversified portfolio. the easiest way to achieve that is to use quantified strategies and have trading algos that trade multiple stocks for you at all times. You can even trade different strategies and also trade on different timeframes at the same time.

Can you swing-trade one stock only?

Yes, you can swing-trade one stock, but you don’t want to do that. First, depending on your trading setup, it may be hard to find trading opportunities as much as you would like because, with swing trading, you trade on a higher (daily or H4) timeframe. Trading only one stock means that you always have to wait for the stock to develop what you consider a trade setup before you can open a trade, and that may not happen quite frequently, whereas if you have many stocks, you are more likely to find your trade setup out of the many different stocks on your watchlist.

Apart from the issue of finding trade setups as often as you would like, trading only one stock comes with a lot of risks, especially for a retail trader. Stock trading is a very risky venture on its own, but putting all your eggs in one basket makes it even more risky. Swing-trading only one stock implies putting all your capital in one stock, and if anything happens in that market, you can lose a huge chunk of your capital or even all of it.

It is always better to trade many stocks as a swing trader. That would mean having a diversified portfolio, which helps you to reduce risk — a loss in one stock would be offset by the gain in another stock.

Examples and a list of single stock strategies

There are different strategies for trading single stocks. Here are some of the common single stock strategies.

  1. OHL Trading Strategy
  2. Opening Range Breakout Strategy
  3. Expiry Trading Strategies
  4. President Election Cycles Stocks
  5. 52-Week High Trading Strategy
  6. Breakout trading strategies
  7. Every open down trading strategy (Buy every open down?)
  8. MACD-histogram trading strategy
  9. Lower highs and lower lows pattern (trading strategy)
  10. Higher highs and higher lows pattern (trading strategy)
  11. NR7 trading strategy – The Narrow Range 7

Now, let’s take a look at the first strategy, the OHL strategy. It is a day trading strategy that uses the Open, High, and Low prices of the first five minutes of the trading day to determine a trade entry signal. So, you use the five-minute or 1-minute timeframe to trade the strategy. Here is how the signal works:

  • Buy signal: You have a buy signal if the Open price = Low of the first five-minute candlestick of the trading day. In this case, you go long with the opening of the next price bar.
  • Sell signal: You have a sell signal if the Open price = High of the first five-minute candlestick of the trading day. In this case, you go short with the opening of the next price bar.

For your stop loss, place it beyond that open price. Your take profit target should be 2x the stop loss to get a 2:1 reward/risk ratio or you close your trade at the end of the trading day if you want to. See the chart below:

Single stock trading strategy

Pros and cons of single stock trading strategies

There are many merits and demerits of using the single stock trading strategy. One of the merits is that stocks are generally more likely to be inefficient than other markets, so each stock presents some good trading opportunities. The reason for the inefficiency is that fewer people trade stocks compared to other markets, and they are more exposed to aggressive sellers and buyers driving prices up and down. Another benefit is that focusing on one stock at a time allows the trader to learn everything that moves the stock, including the fundamental and technical factors, and the trader may get to master the pattern of the stock’s movement.

On the flip side, however, the single stock strategy exposes the trader to huge risks, as it implies putting all eggs in one basket. Any unforeseen adverse price movement (normally, there are many of such) can result in huge losses, unlike when one is trading many stocks where a loss in one stock may be offset by a gain in another stock. It is always better to trade many stocks than to trade only one stock.

Single stock trading strategy backtest

A backtest with specific trading rules and settings is coming shortly.

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