Breakout with 37.1% win rate — Japanese Stock System Trading Basics Course III
“Win rate 37.1%” Breakout
I am Takeshi Nishimura, a securities analyst and seminar instructor on system trading at Fair Trade Co., Ltd. In this course, I will explain how to understand “System Trading” from the basics using simple words and expressions. Please stay with me until the end. The theme this time is “Breakout with a win rate of 37.1%.” Now, let's get into the contents.
In the “What’s Needed for Backtesting” course, we introduced several options for you to perform your own backtesting (verification). After seeing that, many of you might think, “I want to try backtesting myself!” On the other hand, some of you might feel you aren’t quite motivated to go that far. Of course, in the end, it’s best if you perform backtesting yourself. However, not everyone has that goal.
For example,Many people are more interested in “specific trading rules” than in “how to backtest.”In fact, we often receive such opinions. Therefore, this time we will perform a simple backtest of a trading strategy and show the results to you all. And through that,we will deepen our understanding of System Trading.
This time, we will have Masakazu Saito, one of Japan’s leading system traders, introduce the trading rules. Now, I will hand over to Masakazu Saito.
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Nice to meet you, I’m Masakazu Saito. I’d like to take this opportunity to introduce the “trading rules” I actually use. The trading rule I will introduce is“Channel Breakout (new high)”, a simple strategy. This trading rule is one of the main strategies I actually use in trading. (Note: The actual trading rules I use are slightly modified from this.)
A simple rule such as “buy when the XX-day high is updated”is a simple rule, yet depending on how you use it, it can be a highly valuable strategy. Let’s immediately explain this strategy.
Normally, some people might think of stocks as something you buy when they fall. However, this strategy is“buy when the XX-day high (the highest close) is updated”, i.e., a rule that buys when prices rise. In other words,“trend-following type” of strategy.
Of course, there are rules for selling (exit) as well as buying (entry), and the selling rules are the same in reverse,“sell when the XX-day low (the lowest close) is updated”.
Therefore, in short, by these rules you buy when the price has risen to a certain extent and sell when it has fallen to a certain extent, i.e., you trade in line with the current trend.
The specific trading rules are as follows.
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[Buy rule]
・Update the high price of the past 40 days (the highest close)
[Sell rule]
・Update the low price of the past 20 days (the lowest close)
Note: Trades are executed at the next day’s opening price
Whether buying or selling, all trades are executed at the next day’s opening price, so you only need to check the stock price once in the evening each day. For company employees, after work in the evening, you can check the price, and if the conditions above are met, place an order so that it will be executed the next day. There is no need to stay glued to the screen for day trading during market hours.
And,
the results of backtesting the above rules on about nine years of data are shown below.
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[Verification results] (Test period: 2000/01/01–2008/05/16)
Win rate: 37.1%
Average return: +0.89%
Average holding period: 49.94 days
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How is it? After testing the Channel Breakout strategy, the results were “win rate about 37%, average return 0.89%,” which are not particularly favorable.
