Last Updated on April 19, 2022 by Quantified Trading
When to buy and when to sell a stock determines your profit and loss. But what is more important – when to buy or when to sell? Most traders spend almost all their efforts speculating when to buy a stock. However, when to sell a stock is just as important as when to buy. In trading, when to sell a stock can be of greater significance than when to buy!
When you sell or exit a stock is just as important as when you buy the stock. In this article, we look at random buys and entries and spend all our efforts on determining the importance of when to sell or exit a stock. By the end of the article, everyone understands that when you buy a stock is not as important as they think.
Does it matter when you buy a stock?
When to buy and sell a stock are controversial topics among traders. Traders new to the market spend most of their looking for profitable setups but rarely spend much effort and time on when to sell and swing for the fences.
Most traders are always looking for better indicators and new trading tools so they can backtest more to find better strategies. But mind you, when you buy a stock matters less in your success and failure as a trader than you think.
The truth is: when you buy a stock can be done randomly and you can still manage to make a profit. How is that possible?
It’s possible because the stock market is very mean-revertive.
This means, for example, that you can enter randomly, but sell on short-term strength.
We simulate random buys and defined sales and exits
In this section, we buy stock randomly. This means we buy by tossing a coin! All entries is at the close.
The test basket is 77 different ETFs, both equity and debt/interest rates, all listed on US stock exchanges.
The idea is to sell into strength. So the first exit is to simply sell on the first day after entry when the ETF closes above yesterday’s close. The exit is on the close. Here is the equity curve:
The portfolio holds a max of 10 positions at a time. If there are more trades generated, the program picks ETFs randomly. There is a high win ratio, but the winners are a lot smaller than the losers. Still, this simple strategy generates 6,2% in annual return since 2000. There are just 2 losing years. However, this is without commissions. We’re using entry on close and that means there should be no slippage unless our orders move the market.
What happens if we exit on a close that is higher than yesterday’s close plus yesterday’s 50 days ATR (average true range)? Here is the chart:
Annual return increases slightly to 7.4%.
In other words: with a completely random entry you manage a CAGR of 7.4%, which is not bad.
Buy or sell, what should your focus be? When you sell is much more important you imagine.