This is what this Substack is about.
Not copy trading, but the creation and improvement of a mechanical investing system that could generate cash almost by itself in the years to come.
This comes with trials and errors. We’ve been through many, learned our lessons and improved with each of them up to today. Previous improvements helped us manage this month’s drawdown and get out of most AI names with a positive YTD, still beating the S&P 500 while the market’s been extremely violent.
I know it came with frustration, but ignoring the improvements would be ignoring the work of the past months. We’ve identified issues, fixed them, improved, and this write-up covers the new issues we faced these past months and how I intend to fix them so they don’t repeat in the months and years to come. One step at a time.
Covering three verticals today: stock identification, profit taking, risk management.
Stock Identification
I went back through every one of the 49 trades shared since inception and found a clear pattern of winners and losers: the setup.
Breakout patterns won 54% of the time with an average winner at +67%, an average loser at −8%, an expectancy of 32% per trade. Win big, lose small.
Retest patterns had a ~28% win rate with an average win at 17.1% and a -0.3% expectancy. Waste of time, liquidity and mental strength.
Same rules but very different results. And the difference doesn’t come from a lucky trade as even removing Nebius - my biggest winner, breakouts still win half the time and still return ~20% per trade. There’s a difference in the setup, and I’ll focus on this more in the next months.
What I call a breakout is a name bought after breaking its previous lower high and moving averages after a large drawdown and a volume increase, usually in a part of the market most aren’t looking at.
Example with Soitec or Silicom.
A retest is a stock that already performed and is bought on a W50 retest, like Axti or Applied Opto.
Besides the trades taken, there are also the trades not taken. My screeners flagged Victoria’s Secret, Crocs and Zeta as breakouts back in Q1 for example and I preferred AI hardware retests because the tailwind looked stronger. Since then, Victoria’s Secret is up ~130%, Crocs ~75% and Zeta ~61%. We even caught Zeta and closed it early to buy an AI retest.
I don’t want to draw conclusions too quickly as the sample isn’t that large but the concentration of winners and losers is pretty clear. Enough to act on it.
From now on, most picks will be breakouts. Just note that they usually form where most aren’t looking - healthcare lately, so we might not be talking much about the noisiest names on social media, although they were rarely the best performers either way.
That’s improvement number #1.
Profit Taking
This has been the Achilles heel of the last months. We’ve worked on it already, but I want to make it official.
Names like UiPath or Axti round-tripped 50%+ returns without a single profit taken, while the chart gave easy and identified places to do it. Letting winners run is the objective. Letting them run back to zero is not.
On UiPath, we bought the breakout perfectly, let the stock run to its previous high 45% higher, an easy trim, and let it round-trip.
Holding into that previous high is too risky. Breakouts usually give a retest as traders take profits so we could buy back our shares then. More often, traders take profits before the high and the stock round trips. Either way the risk/reward favors trimming.
Trimming will help rotate liquidity and buy back on lower retests if possible. Doing this on Nebius and Soitec allowed us to own more shares without new net liquidity inflow, so those winners compounded even better. Trimming didn’t slow compounding, it added to it while lowering risk. That’s what we try to achieve.
From now on, every purchase will come with an identified profit taking zone where 30% of the position will be trimmed.
Risk Management
Lastly, still a work in progress, but I want to talk about it because I’ll start to apply it.
On names that have run already, I’ll trim when they break their daily trend, meaning closing below their D21 and previous higher low. Take profit before the short-term downtrend, not after.
Using Soitec as an example, to illustrate.
Higher highs and higher lows the whole way up, until it broke the D21 and the previous higher low ~$147. We had already trimmed 30% at ~$150 a few weeks before. It then fell ~40% back into its W50, which we bought again with the profit from that trim.
Not all stocks behave this well. Some fake out and run higher. Those that do will be like those that got trimmed and kept running. We’ll continue to hold onto a pretty large position either way and either wait for a retest or rotate that liquidity.
The exact trimming sizing isn’t locked yet, that’s the part I’ll be working on.
From now on, daily close below D21 and higher low will see a trim to manage risk. We will improve this rule in the next months.
Final Words
Once again, the core of this Substack isn’t to be a trading signal but to share great opportunities and ride their trend as mechanically as possible, with the least emotion possible.
I don’t believe performance comes from gut feelings, multiples, or reading 10-Ks we aren’t equipped to understand perfectly - we’re not that smart. I think the last few weeks made that case for me.
I do believe anyone can outperform the market with good enough tools and rigor, shaped to their own personality, risk tolerance and objectives. That’s what I’m building here, a system that can adapt to each of us and perform for us.
These improvements are on top of what we fixed last quarter, and I can only hope for many more. Mistakes are only here so we can learn from them.
We’ve only finished the first kilometer of our marathon.
Disclaimer: I am not a licensed financial advisor, analyst, or broker. This content reflects my personal opinions and investment decisions for informational and educational purposes only. I hold positions in securities discussed and may buy or sell without notice. Nothing here constitutes a recommendation to buy, sell, or hold any security. Past performance does not guarantee future results.
Always conduct your own research and consult a qualified professional before making investment decisions. I accept no responsibility for any financial losses.