Introduction to the Weekend Trend Trader Strategy

Overview of the Weekend Trend Trader Approach

Here’s a simplified outline of the Weekend Trend Trader strategy:

Stock Selection: This strategy is applied to a group of highly liquid stocks. Typically, it focuses on large-cap stocks, selected based on criteria like market capitalization and average daily trading volume. Commonly, this might include the top 500 or 1000 stocks by market capitalization. While these guidelines are flexible, remember that stocks with low volume can result in significant slippage.

Entry Criteria:

1. Trend Identification: Utilize technical indicators to determine the market trend. This might involve moving averages, trendlines, or price breakouts.
2. Momentum: Select stocks that are performing well over a specific lookback period, based on momentum indicators.
3. Relative Strength: Prefer stocks that exhibit stronger performance relative to the overall market. Indicators such as the Relative Strength Index (RSI) or performance rankings can help in this assessment.
4. Breakouts: Look for entry signals when a stock breaks above its recent high.
5. Market Regime: Consider whether the overall market is in a bullish or bearish phase to avoid going against the market trend.

Position Sizing:

• Employ a fixed fractional position sizing strategy, allocating a set percentage of your total capital to each trade.
• Typically, risk per trade is kept between 1-2% of the total capital.
• Nick Radge suggests adjusting position sizes based on stock volatility, with less capital allocated to more volatile stocks.

Risk Management:

• Stop-Loss Orders: Implement predefined stop-loss levels to minimize potential losses. These can be based on a fixed percentage of the entry price or volatility measures like the Average True Range (ATR).
• Trailing Stops: Use trailing stops to secure profits as the trade moves favorably. Trailing stops adjust upward but not downward.

Exit Criteria:

• Profit Targets: Set predefined profit targets based on risk-reward ratios, such as aiming for a reward that is 2-3 times the risk. Note that Nick Radge may not use specific profit targets.
• Trend Reversal: Exit trades based on signals of trend reversals, such as moving average crossovers or price breakouts in the opposite direction.
• Time-Based Exits: Close trades after a set period to release capital and mitigate risk.

Weekly Review:

• Review trades and potential setups during the weekend. This allows for objective decision-making and adherence to your trading rules. Adjust stop-losses, exit trades that have hit stop-loss or profit targets, and identify new opportunities.

Implementation Example: Here’s a basic example of applying the Weekend Trend Trader strategy:

1. Universe Definition: Choose the top 500 stocks by market capitalization (e.g., S&P 500).
2. Entry Signal: Buy a stock if it closes above its 50-day high and ranks in the top 10% of stocks by 3-month relative strength.
3. Position Sizing: Allocate 10% of your total trading capital to each trade.
4. Stop-Loss: Set an initial stop-loss at 20% below the entry price. (Although stop-losses are not universally recommended, some traders prefer them.)
5. Trailing Stop: Implement a trailing stop set at 20% below the highest close since entry. Adjust according to the market regime.
6. Weekly Review: Each weekend, evaluate all positions and potential new trades. Modify stop-losses, close trades hitting stop-losses or profit targets, and identify new trading opportunities.Backtesting the Weekend Trend Trader Strategy: Returns and Performance
7. Backtest Overview
8. We tested the Weekend Trend Trader strategy on various stock indexes, using data from Norgate, which is free from survivorship bias. Our backtest spans from January 1990 to the present and allocates 10% of capital to each position, maintaining a maximum of 10 stocks at any time. We based our trades on weekly bars, executing buys and sells at Monday’s open. Note that commissions and slippage were not included in this analysis, as the frequency of trades is relatively low.
9. Backtesting Results by Index
10. S&P 100 (OEX) Backtest
11. Number of Trades: 217
12. CAGR (Annual Returns): 14.9%
13. Average Duration: 65 weeks
14. Capital Invested (Market Exposure): 82%
15. Max Drawdown: 51%
16. Equity Curve: [Graph of performance]
17. S&P 500 (SPX) Backtest
18. Number of Trades: 248
19. CAGR (Annual Returns): 19.9%
20. Average Duration: 103 weeks
21. Capital Invested (Market Exposure): 85%
22. Max Drawdown: 43%
23. Equity Curve: [Graph of performance]
24. Nasdaq 100 (NDX) Backtest
25. Number of Trades: 286
26. CAGR (Annual Returns): 16.5%
27. Average Duration: 72 weeks
28. Capital Invested (Market Exposure): 84%
29. Max Drawdown: 55%
30. Equity Curve: [Graph of performance]
31. S&P Midcap 400 (MID) Backtest
32. Number of Trades: 303
33. CAGR (Annual Returns): 22.9%
34. Average Duration: 121 weeks
35. Capital Invested (Market Exposure): 82%
36. Max Drawdown: 58%
37. Equity Curve: [Graph of performance]
38. S&P Smallcap 600 (SML) Backtest (from 1995)
39. Number of Trades: 377
40. CAGR (Annual Returns): 9.1%
41. Average Duration: 121 weeks
42. Capital Invested (Market Exposure): 86%
43. Max Drawdown: 69%
44. Equity Curve: [Graph of performance]
45. Russell 2000 (RUT) Backtest
46. Number of Trades: 675
47. CAGR (Annual Returns): 0.1%
48. Average Duration: 100 weeks
49. Capital Invested (Market Exposure): 81%
50. Max Drawdown: 81%
51. Equity Curve: [Graph of performance]
52. Key Findings and Further Research
53. Performance Variability: The strategy shows varying performance across different indexes. For instance, the S&P Midcap 400 achieved the highest annual returns but also experienced significant drawdowns. In contrast, the Russell 2000 underperformed with minimal returns and substantial drawdowns.
54. Market Suitability: We believe the strategy might perform better in markets outside the US. For example, Australian stocks could be more suitable due to their different market dynamics, which may align better with the strategy. This is based on the idea that commodity-exposed economies may yield better results.
55. Stock Capitalization Impact: Smaller-cap stocks often require larger stop-loss levels compared to large-cap stocks. For instance, increasing the trailing stop to 40% for mid-cap stocks improved performance, unlike for large-cap stocks where a 20% trailing stop suffices.
56. Conclusion

The Weekend Trend Trader strategy demonstrates varied success depending on the stock index and market conditions. Future research could involve testing this strategy in international markets and adjusting parameters based on stock capitalization to optimize performance.