cent of your equity at all times. The more money you need to tie up to reach a cer-
tain return, the riskier the strategy, because the more you stand to lose if things go
severely against you.
For this strategy, you only need to tie up 67 percent of your capital on aver-
age, and only be in each stock 13 percent of the time. Thus, you will have plenty of
available capital left for other investment or trading endeavors, which will increase
your total return even further, while you also achieve additional diversification.
Also, if the strategy is any good, the time spent in the market for any individ-
ual stock should be high-quality time, meaning you should only be in a trade when
you have the highest likelihood for success, or at least the lowest likelihood for fail-
ure. This too, makes a mechanical trading strategy less risky than staying in a buy-
and-hold, where you have to stay in the market, come hell or high water. This should
show up in the number of profitable months, which should be higher for the mechan-
ical strategy than for the buy-and-hold strategy and preferably also closer to 70 than
60 percent—although this is not the case this time (compare with Table 28.1).
As for the drawdowns, Figures 28.15 and 28.16 once again tell us that the
strategy worked very well up until the latest bear market, at which time it started
to give back previously made profits. To come to grips with this, complement this
strategy with one for the short side and possibly also decrease the amount risked
per trade when all signs indicate we’re in a bear market.368 PART 4 Money Management
FIGURE 28.15
The equity curve for Strategy 11.