The Value & Growth Strategy’s Trading Rules
The Trading Rules are the heart of the strategy. They decide when to buy and sell in back-tests and when to raise trading signals during Live trading.
Buy Rules
The Buy Value & Growth rule’s job is to monitor the prices of each share in the Value & Growth Buy List. As you know, prices tend to oscillate up and down over time, while generally moving in a longer term trend. So the buy rule waits until the price has hit a a local low and has then started recovering, before it signals a buy. That buy will then be for the nominal trade-size (determined by the Trade Sizing settings). This behaviour is captured by the following definition (the Lower Long Reversal and Short Channel Rising terms are defined in the Spec’s Shared Terms):
‘Buy Value & Growth’ trading-rule signals ‘Open Position’ in the evaluated security, for the nominal trade-size, when: the evaluated security is in the ‘Value & Growth Buy List’ security list, AND the ‘Lower Long Reversal’ term is true
‘Lower Long Reversal’ = a condition that is true if the evaluated security’s lowest low price, up to today, has previously been in or below the long channel’s Lower Turn-Band (outer), AND the ‘Short Channel Rising’ term is true
‘Short Channel Rising’ = a condition that is true if the evaluated security’s short channel’s trend today, is rising
To track the position of the price in the longer term trend we use the long term AutoTrend price-channel, which typically tracks trends of 6 months or more. A very useful feature of the AutoTrend channels is that they automatically track the movement of the highest high and lowest low prices reached in the price-channel, as described in Highest & Lowest Band Tracking. Another valuable feature is that the AutoTrend medium and long term channels are sub-divided into named bands, parallel to the trend line, which makes it very easy to reference where the price is in the channel. These are illustrated below and described more completely here.
The Lower Long Reversal term uses these features to determine when the lowest low price has reached the lower outer side (the ‘Lower Turn Band (outer)’ ) of the channel (i.e. a local low) and then reversed and begun a steady climb up out of the trough, as determined by the Short Channel Rising term (the short channel is typically a week or two long). When all these conditions are met, the Buy Value & Growth rule is triggered. In back-tests, this causes the trade to be made. In Live sessions, it results in a trade-signal being displayed in the RuleTrader Signal column.
Sell Rules
There are three sell rules defined for the V&G strategy, which are applied to all shares in the strategy’s list that have an open position. Lets take each of them in turn.
Sell Value & Growth If Underperforms
This closes the entire position (which it classes as Taking Profit, for reporting purposes) when its market cap drops below £20M, or it no longer meets the debt restrictions imposed by the V&G Strategy’s List Selector, or the company no longer meets the minimum requirement for the cash or profit returned on the capital invested in it. However, if the share price happens to be rising then the sale is delayed until the short term trend starts to fall (Adequate Return is defined in the Strategy Terms and Short Channel Rising is defined in Shared Terms):
‘Minimum Annual Return’ = 10%
‘Adequate Return’ = a condition that is true if the evaluated security’s ROCE is greater than or equal to ‘Minimum Annual Return’, OR the evaluated security’s CROCI is greater than or equal to ‘Minimum Annual Return’
‘Short Channel Rising’ = a condition that is true if the evaluated security’s short channel’s trend today, is rising
‘Sell Value & Growth If Underperforms’ trading-rule signals ‘Take Profit’ in the evaluated security, for the entire trading position, when: the ‘Too Small’ term is true, OR the ‘Too Much Debt’ term is true, OR the ‘Adequate Return’ term is false, AND the ‘Short Channel Rising’ term is false; where:
- ‘Too Small’ = a condition that is true if the evaluated security’s market capital (£) is less than 20
- ‘Too Much Debt’ = a condition that is true if the ‘Low Gearing’ term is false, AND the ‘Covered Gearing’ term is false
- ‘Low Gearing’ = a condition that is true if the evaluated security’s net gearing (ex. intangibles) is less than or equal to 20%, OR the evaluated security’s net gearing (ex. intangibles) is not defined
- ‘Covered Gearing’ = a condition that is true if the evaluated security’s net gearing (ex.intangibles) is between: 20% and 80%, AND the evaluated security’s interest cover is greater than or equal to 2
Too Much Debt is the only term that needs explaining. Basically net gearing must be undefined (i.e. the company has no debt); OR net gearing must be <= 20% (both of these are tested in the Low Gearing term); OR it can be between 20% – 80% provided interest cover > 2 (tested in the Covered Gearing term). If this isn’t the case, then Too Much Debt is true and the position is sold (provided the short term trend is also downwards).
Sell Value & Growth On Long Fall
This rule is designed to stop losses by closing the position when the long term trend breaks downwards, provided the short term channel is also falling. This is because when the long channel breaks downwards, it can often be followed by an upwards retracement, so it makes sense to let the share price get as high as possible before executing the sell. However, even with the retracement, the strategy takes the view that a big downward break indicates it’s time to abandon the position. Otherwise, the rule and its terms are self-explanatory (Short Channel Rising is defined in Shared Terms):
‘Short Channel Rising’ = a condition that is true if the evaluated security’s short channel’s trend today, is rising
‘Sell Value & Growth On Long Fall’ trading-rule signals ‘Stop Loss’ in the evaluated security, when: the ‘Long Channel Is Falling’ term is true, AND the ‘Short Channel Rising’ term is false; where:
- ‘Long Channel Is Falling’ = a condition that is true if the evaluated security’s long channel’s trend today, is falling
Rebalance Portfolio
The Rebalance Portfolio rule is defined in the Shared Rules tab, as it is shared between both strategies in the Spec. When you share a rule or list selector, you can either copy it or link it. In this case the rule is linked, which means any changes to the rule in the Shared Rules tab are automatically reflected in the instances of the rule in each strategy.
The Rebalance Portfolio rule reduces the size of a position, if its value exceeds 10% of total capital. It does this by selling part of the position to leave the nominal trade-size (defined in Trade Sizing) invested:
[LINKED] ‘Rebalance Portfolio’ trading-rule signals ‘Decrease Position’ in the evaluated security, for ‘Amount to Reduce’ (£), when: the ‘Position Is Over Sized’ term is true; where:
- ‘Amount to Reduce’ = the evaluated security’s total value of its current position (£), MINUS the nominal trade-size
- ‘Position Is Over Sized’ = a condition that is true if the evaluated security’s total value of its current position (£) is greater than ‘Max Value’
- ‘Max Value’ = ‘Total Capital’ (£), MULTIPLIED by 10%
