This model has generated very impressive returns, both from great trade signals and from consistent application of the rules. As with any automatic rules-based system, there will be times when it is easier to follow the signals and times when the signals might not make as much sense. As a general rules of thumb with any trading strategy, we have found that most traders lose their discipline for two main reasons:

#1. They trade positions that have too much risk and this leads to incorrect trading decisions such as taking profits too soon, selling to prevent losses at the wrong time, or being afraid to enter new trades. The best way to overcome this problem is to start slowly.

#2. They don’t understand and believe in the trading rules of the system.

We have intentionally tried to keep the rules fairly simple to follow to help overcome some of these issues. We recommend that you start slowly to develop your trust and belief in the strategy. One day’s or even one month’s performance will not always be representative of the types of return or trading characteristics you can expect.

You do not need to start with real money, and you certainly do not need to start big! Building bigger positions is easy once you are comfortable and knowledgeable about the system. The most important part of getting started is finding the right low risk way for you to begin. The questions and answers below should help you towards that end. The information in the “How to Use The Model” page will also be helpful.

How do I start trading this strategy?

You can start any time. The model only issues new trading signals on the calendar effects date (around the 25th) of every month to be entered on the following day at the open.During the month, there will not be “new” trade signals but there can be trading events like reaching a profit target or hitting the initial stop or trailing stops.

We have a share calculator found in the “Open Positions” on the Model Portfolio page. This shows you the percentage of the total portfolio for each position and position slot. You can use this tool to figure out how many shares to buy to start a portfolio mid-month or rotate into new positions. Instructions on how to use the share calculator can be found below in the “Starting A Portfolio” section.

You are free to paper trade, “leg” into trades, selectively trade certain symbols or signals, or modify your trading in any way from the rules and methodology employed by the model portfolio. If you do so, your results will obviously be different from the model portfolio, but could be higher or lower in any given period of time.

One of our holdings dropped out of the top seven, why are we still in the position?

Rankings and rotations are only done around the calendar effects date (around the 25th of each month). During the month, a stock might climb or fall in ranking, however, once we initiate a position in a stock, we will stay in it until either a stop or target is reached or the model tells us to rotate out of a position for the following month.

One of our holdings is reporting earnings soon, should I get out of this position?

Normally we would not recommend holding a stock through earnings. They can be fairly random events that could cause a stock to gap up or down considerably. However, the Large Cap Leaders system does hold its positions through any earnings events that occur for positions it is holding. This can work for or against us on any given trade. However, the effect from any single earnings move will be mitigated by the fact that we have five holdings, we often have take profits off the table ahead of earnings, and in our research the overall historical effect on the equity of this strategy by holding through earnings was positive.

You can still choose to get out of a position prior to earnings (and re-enter afterwards), however, the model will continue to track performance based on holding the positions through earnings.

Should I enter existing positions or wait for new entries?

You are free to enter new positions at your own pace or timing, however, since we never know how long a trade will last and entering positions consistent with the model allows you to start tracking its overall performance immediately,  we have provided a position calculator tool on both the “Model Portfolio” and “Tools” pages that will help you establish a portfolio, whether it is the first day of the month or the middle of the month. The “Tools” page provides the necessary data and instructions for setting up a portfolio that tracks the model portfolio.

How much capital should I use to trade this strategy?

The question of how much capital a trader should allocate to any trade or strategy is going to have a different answer for every trader based on capital available and your own personal trading style and risk profile. Additionally, MarketGauge is not licensed to be able to give that type of specific advice. A good rule of thumb is to start slowly.

Regardless of how you start, you should always limit your capital to an amount that represents a level of risk that you can afford to lose. You can even paper trade the model for several weeks or a month to see how it trades. However, one period may not be representative of the return, risks, or volatility of the model over a longer period of time and in different market conditions.

There is a built-in level of diversification with the model typically holding seven large-cap positions. However, with any momentum model, diversification by itself doesn’t prevent draw downs as momentum stocks can often have simultaneous and similar responses to market action.

For this reason, it might be helpful to initially consider a position size for the whole model that might relate to an amount you would put in a more speculative stock.

How much of each position should I buy?

The model typically holds seven instruments. New positions are added with the position size from the prior position but usually approximates 15% of the total portfolio (1/7th).  Once a position has been started, its percent of the portfolio can grow or shrink based on its relative performance. We have provided a position calculator tool on both the “Model Portfolio” and “Tools” pages that will help you establish a portfolio, whether it’s at the start of new trades or mid-month.

You can use this to recreate the model portfolio in your own account. Recreating the portfolio in this manner will allow you to most closely track the model portfolio’s performance going forward.

What happens when my positions are no longer equal-dollar amounts?

Position sizes and portfolio spot sizes will naturally vary overtime and can diverge quite a bit if one position really starts to move. The portfolio is rebalanced twice annually – meaning that the profits or losses from positions are shuffled back into the model by setting / resetting each portfolio spot to 1/7th of the real-time portfolio value. Portfolio slots that have already reached profit targets are balanced to the percent of the trade left on. For instance, if a position has reached a profit target and sold 25%, that means 75% of the position is left on. So after a rebalance – that position should be 1/7th of the portfolio with ¼ of that position left in cash and the other ¾ of the 1/7th in the stock.

You may employ similar money management and rebalancing rules or come up with your own variation based on your trading style. The model performance and statistics will reflect the money management rules we have outlined here but the performance difference from rebalancing will often be minor. 

What is the TSI?

This is our proprietorially generated Trend Strength Indicator (TSI) which is used to measure momentum in stocks. Momentum is one of the best tools we have in the market to identify leading stocks that tend to continue to do well. It is supported by decades of research and real-world experience and is the basis of several Marketgauge quantitative models. The model uses the TSI as well as other proprietary methods to rank and determine which seven S&P 500 stocks to be in.

How do you buy at the open?

The model rotates in and out of positions by buying and selling the positions on the open of the following trading day after the calendar effects ranking occurs. If you would like to place orders before the market opens and get the “open” price you can use an order called “Market on Open.” Each broker or trading platform may have a slightly different name for this type of order so check with your broker if you are not familiar with it (some brokers may not support this order type).

This order is generally placed before the open and gives you the “open” price. The open price is determined by a process where the pre-market open orders are evaluated by specialists which determine the market clearing price at the open. 

You may also place market orders immediately after the market opens to enter these orders. Your entry price should typically be very close to the one used in the model and this may be easier to use than the “market on open” order type.

Additionally, some traders may use the first 5 minutes or 30 minutes (opening range concept) to further refine their entry criteria. For the purposes of model performance reporting, the model will use the opening price for its entry price.

What are “Large Caps”?

Large Cap refers to stocks and companies that have market capitalizations typically greater than $10 billion. Large cap stocks tend to have lower volatility and may hold up better than the overall market in a sell-off. 

Starting A Portfolio

You can get started at any time regardless of how far positions have moved from the model entry or how many profit targets we have reached. By starting positions at roughly the same size as the model’s current holdings, your portfolio will closely track the model going forward (so if the model is up 5% your positions/portfolio should be up 5%).

To get started you will enter the same positions as the model portfolio and make each position replicate the allocation percentage of the portfolio (position size). For instance, if the model portfolio position #1 is equal to 12% of the portfolio value, then your position #1 should be 12% of the capital you’ve allocated to this strategy. 

We have a “Share Calculator” in the open positions that will make it very easy to figure out exactly how many shares of each position to buy at any given time in order for your portfolio to replicate the day to day performance of the model.

The Position Calculator provides the sample number of shares for portfolios of $10,000. You can use the values to calculate the number of shares for any custom-sized portfolio. For instance, if you are trading a $5,000 portfolio, you would just take the $10,000 portfolio and buy half as many shares.

You can also use the “multiple” method to determine how many shares to buy. If you are trading a $17,000 portfolio, $17,000 is a 1.7 multiple of $10,000. So you can figure out how many shares to buy by taking the $10,000 portfolio recommendation and multiplying it by 1.7. So if it recommended buying 100 shares, the $17,000 portfolio would buy 170 shares.

Keep in mind that your portfolio size will constantly grow or shrink based on market action and to accurately calculate position size and take advantage of compounding, you will need to base your position size on your actual portfolio, and not the round numbers shown in the default increments ($10,000).

Since the trades are already in progress, your entry price will be different from the model and your stops or targets could be closer or further away than the original model position, but what is important is that your real-time portfolio performance should very closely replicate the published results. We recommend using the model’s stops and targets regardless of your entry price to ensure that your portfolio matches the model on a go-forward basis.

When you start a portfolio from scratch, use the “% of Total Portfolio” and “Shares to Own Per $—-” to establish new positions with the correct allocation. When you start a new portfolio the important relationship is each position’s value as a percentage of the portfolio. This allows you to start a portfolio and follow the performance of the model regardless of where the trades are setup or what the recent market action has done.

To enter new model trades, you will buy approximately 1/7th of your capital allocated to the model.

At times, some of the portfolios might have a position in “cash” or have already reached multiple targets and have very little exposure to a position left. The real-time portfolio position sizing recommendations take these factors into consideration when showing the recommended share totals.

Once you have established your initial portfolio sizes and positions, you can continue to track the current positions and follow along with the stops, targets, and trade updates in the “Model Portfolio” section of the member area.