3 Best Entry Points: Forward Testing the Wealth Trading Strategy

Mastering the Art of Wealth Trading

Powerful Tools for Identifying Optimal Entry Points

We will conduct a forward performance test of Oliver Velez's Wealth Trading Strategy featured in his YouTube tutorial How to use the 50, 20, and 200 SMA All Together. Despite our limited understanding, testing the strategy is the only way to evaluate our trading plan. We may encounter losses, but we will also gain insights. As Oliver Velez said, "It is impossible to win until you become experienced and impossible to become experienced until after you have become the number one expert at losing."

1. Monthly Candlestick Chart
2. 20-Moving Average (simple, in blue color)
3. 50-Moving Average (simple, yellow color)
4. 200-Moving Average (simple, red color)

Forward performance testing

Forward testing is a method of evaluating a trading strategy or system using real-time or future data, rather than historical data. It involves applying the strategy to current market conditions and tracking its performance over time to see how well it performs in practice. This can help traders gain confidence in their strategy and identify any potential issues or areas for improvement before risking real money. Please refer to the article Backtesting and Forward Testing: The Importance of Correlation published by Investopedia.com for a more detailed discussion. 

Here are more details about our forward testing activity:

• Method of analysis: Technical Analysis

• Trading style: Swing Trading

• Holding period: 3 hours to 3 months

• Buying power: Php 15,000

• Stock bias: Ayala Land, Inc.

• Number of trades: 20

• Max daily loss: Php 300

3 Best entry points for ALI

• Buy color near the 20-Moving Average (simple)

• Buy color between 20- and 50-Moving Average (simple)

• Buy color near the 200-Moving Average (simple)

#1 Buy color near the 20-Moving Average (simple)

Based on the 20-MA performance, it would be wise to hold on to cash at the moment since ALI closed at Php 27.70, way below its 20-MA. Although we have identified the 5 best entry locations to buy ALI over the past 13 years, it is best to use the entry point when the 20-MA is rising. However, it is important to note that all these entry points occurred before the COVID-19 pandemic collapse.

#2 Buy color between 20- and 50-Moving Average (simple)

Based on our analysis of ALI's 20-MA and 50-MA performance, it would be wise to hold on to cash for now. ALI hasn't seen much trading activity in the zone between the 20-MA and 50-MA this year, indicating that it may not be the best entry point at the moment. However, in the past 13 years, we have identified the 5 best entry locations to buy ALI, all of which occurred before the pandemic. It's worth noting that these entry points were found in the zone between the rising 20-MA and rising 50-MA, which is considered the optimal entry point for many traders. Nonetheless, given the current market conditions, we believe that holding on to cash is the best course of action.

#3 Buy color near the 200-Moving Average (simple)

It appears that our decision to resume our online trading activities and use ALI to forward test some trading strategies for SMALLCOST may not be favorable at the moment, given our aim to promote stock market participation among traders with limited capital. However, we can still find hope in our Rule #3, which prioritizes the 200-MA.

Applying Rule #3 to assess the movement of ALI in relation to the 200-MA shows very a promising entry point in between Php 27.70 and Php 28.50 price zone. Are we going to win in this trade? Let's find out this week. But the more important question is what should be our stop-loss level. That is a question for risk-to-reward ratio to answer.

Risk-to-Reward Ratio Calculation for ALI:

• Entry point: Php 28

• Target Exit:  Php 30

• Stop-Loss level: Php 27

• Risk-to-Reward Ratio: 1:2

• Reward Protection: 75%

• Minimum exit point: Php 29.50

• Risk (Potential Loss): 28 - 27 = 1

• Reward (Potential Profit): 30 - 28 = 2

• Reward Protection: Php 2 * 75%

• Protected Reward: Php 1.5

• Minimum Exit Point: Php 29.50

Using the formula:

• Risk-to-Reward Ratio = (Potential Loss) / (Potential Profit)

• Risk-to-Reward Ratio = Php 1 / Php 2

• Risk-to-Reward Ratio = 1:2

Here we have a risk-to-reward ratio of 1:2, which means the potential profit is twice the size of the potential loss.

Benchmarking: BPI Trade Trader's Takedown Dated March 30, 2023

We are sharing verbatim the BPI Trade Trader's Takedown dated March 30, 2023, for its Stock Feature: ALI as our benchmark:

"We maintain our BUY rating on ALI and keep our PT of Php40/shr (+38% potential upside), which is based on a 50% discount to NAV. While expectations of prolonged elevated interest rates present downside risks to ALI's residential business (~50% of FY22 sales), we think this is more than priced-in by the 18.8% YoY decline of the stock compared to the 7.2% drop in the PCOMP over the same period. ALI still trades at a wide discount to historical levels (~64% discount to NAV and FY23F P/E of 18.3x vs. 5-year average PER of 32x) with current valuations ascribing zero value to its mall portfolio or a 45% discount to its land bank value, in our view. We believe that the valuation discount is unjustified, especially given ALI's: 1) position as the 2nd largest mall operator in the country, a clear beneficiary of the recovery in domestic consumption; and 2) vast land bank (~12k ha), the largest among the listed property firms."

What to expect

The Risk-to-Reward Ratio Calculation for ALI is a crucial step in determining the potential profit and loss in a trade. With an entry point of Php 28, a target exit of Php 30, and a stop-loss level of Php 27.00, the risk-to-reward ratio is 1:2, meaning the potential profit is twice the size of the potential loss. To further protect the potential profit, a reward protection of 75% is implemented, resulting in a protected reward of Php 1.5. The minimum exit point is Php 29.50. With this information, we can expect to make 20 trades within a 90-day period to test this trading strategy and aim for a minimum of 6% to 8% gain. It is important to note that while the risk-to-reward ratio is favorable, there is still a potential for losses, and proper risk management is crucial in any trading activity. 

Stay tuned for our updates as we aim to achieve a 60%-to-70%-win rate and master the art of wealth trading as well as become experts at losing responsibly.