Momentum investing involves taking advantage of, and making profits from, upward trends in a stock. The strategy makes a calculated bet that the stock market’s recent winners will remain winners.
The most celebrated momentum-following strategy is the The Turtle Trading System, which is a chart strategy created by Richard Dennis and William Eckhardt during the 1980s.
The program recruited and trained a group of traders to trade stocks based on the System, and achieved remarkable success. Some of the traders recruited reportedly made millions of dollars in profits.
The Turtle Trading System is based on four principles:
Principle 1: Following momentum
The Turtle System uses a variety of technical indicators, such as the moving average indicator (explained more below), to identify trends and decide when to enter and exit trades.
One strategy is to buy when the stocks’s weekly close is above the 50-day moving average.
Alternatively, the strategy also allow monthly or daily closes to be used vs the 50-day moving average to decide if you should buy the stock.
Principle 2: Position Sizing
The Turtle Method employs a position sizing method known as the “1% risk rule.”
This rule states that traders should risk no more than 1% of their account balance on any one trade.
For example, if a trader has $100,000 in his trading account, he/she should not risk more than $1,000 on any single trade.
Principle 3: Entry and Exit
The System uses a series of rules to decide when a trader should enter into/exit from a trade.
We’ve already discussed one entry rule above i.e. buying when the stock price closes above a moving average.
Another rule is to buy a stock when the price breaks above the 20-day high, and exit when the price falls below the 10-day low.
Or, buy when the stock price is above the 20-day high, and sell it falls below the 10-day low.
Principle 4: Risk Management
Finally, the Turtle System puts emphasis on risk management in order to control losses and preserve capital.
The system encourages stop-loss orders to limit a trade’s downside risk.
In other words, when a trade moves against the trader, the trade will automatically be closed out if a specific price is reached, limiting potentially bigger losses.
To apply the Turtle Trading System, there are several indicators that can be used to signal momentum of any given stock, and here we look at three main ones:
52-week high
Simple Moving Average
Relative Strength Index
SIGNAL 1: 52-week highs
Traders often view the 52-week highs as entry signals.
This is due what’s called the “52-week high effect” – where if a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.
On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.
10 ASX small caps at 52-week high
(data from Commsec)
Code Name Price How far from 52-Week High? 1 mth return 6 mth return 12 mth return TD1 Tali Digital $0.002 0.00% 33.33% 100.00% 0.00% PCL Pancontinental Energy $0.03 0.00% 19.05% 78.57% 150.00% SKS SKS Technologies $0.60 0.00% 57.89% 224.32% 233.33% TBR Tribune Resources $4.54 0.00% 33.92% 50.83% 12.66% UOS United Overseas $0.61 0.00% 10.00% 17.48% 8.04% IPT Impact Minerals $0.02 0.00% 33.33% 100.00% 81.82% EXT Excite Technology $0.01 0.00% 50.00% 100.00% 71.43% GDG Generation Development $2.15 0.00% 9.14% 36.94% 82.20% TOU TLOU Energy $0.04 0.00% 18.92% 46.67% 2.33% GNX Genex Power $0.27 0.00% 10.20% 80.00% 68.75%
Drilling is well underway at the Hyperion Rare Earth Element (REE) Prospect – part of the Arkun Project in WA – to test a large Rare Earth Element soil geochemistry anomaly.
The soil anomaly covers at least a 3km2 area at greater than 1,000ppm Total Rare Earth Oxide (TREO+Y) with peak values up to 5,880ppm (0.59%) TREO+Y and Nd+Pr of up to 21%.
The soil anomaly is hosted in weathered granite and is prospective for a large clay-hosted REE deposit.
SIGNAL 2: Simple Moving Average
Simple Moving Averages (or SMA) is another indicator that can be used to gauge momentum.
SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.
As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA, the trend is down.
10 ASX small caps at prices above SMA
(data from Commsec)
Code Name Last Price Value Price vs. Simple Moving Average Price vs. 20 day SMA Price vs. 50 day SMA Price vs. 200 day SMA AAR Astral Resources NL $0.07 >5% Above SMA >5% Above SMA >5% Above SMA 0 to 1% Above SMA BIS Bisalloy Steel Group $3.24 >5% Above SMA >5% Above SMA >5% Above SMA >5% Above SMA AMO Ambertech $0.33 >5% Above SMA >5% Above SMA >5% Above SMA >5% Above SMA ANG Austin Engineering $0.51 >5% Above SMA 1 to 5% Above SMA >5% Above SMA >5% Above SMA ASE Astute Metals NL $0.03 >5% Above SMA >5% Above SMA 0 to 1% Above SMA < -5% Below SMA CYM Cyprium Metals $0.03 >5% Above SMA >5% Above SMA >5% Above SMA < -5% Below SMA FML Focus Minerals $0.20 >5% Above SMA 1 to 5% Above SMA >5% Above SMA >5% Above SMA TD1 TALI Digital $0.00 >5% Above SMA >5% Above SMA >5% Above SMA 1 to 5% Above SMA MRD Mount Ridley Mines $0.00 >5% Above SMA >5% Above SMA >5% Above SMA 0 to 1% Above SMA GSR Greenstone Resources $0.01 >5% Above SMA >5% Above SMA >5% Above SMA 0 to 1% Above SMA
Recent RC drilling at Kamperman has successfully in-filled the Prospect to the south, and extended the known mineralised strike by a further 100m to the north.
Assay results received from the remaining 15 holes of a 19-hole/2,459m Reverse Circulation (RC) drilling program at the Kamperman Prospect (Feysville Gold Project), with best results including: 13m at 3.95g/t Au from 35m including 1m at 45.6g/t Au from 41m.
With 14 of the 19 holes now drilled in this latest campaign, Astral says Kamperman is advancing towards a potentially very valuable source of high-grade satellite ore.
Bisalloy recently received a purchase order of processed Australian steel by a major US military shipbuilder Newport News Shipbuilding (NNS), a division of HII, the largest military shipbuilder in the US and one of two US companies that designs and builds US nuclear-powered submarines.
Newport News Shipbuilding (NNS) will use the steel for training and testing with this order representing a critical step in strengthening the industrial supply base for the AUKUS program.
Bisalloy is Australia’s only manufacturer of high-strength structural, wear-resistant and armour steel plates using quenched and tempered steel.
SIGNAL 3: Relative Strength Index
Here’s another momentum signal used by the market – the Relative Strength Index (RSI).
RSI is a measure of the strength of a stock’s momentum, either in the upward or the downward direction, and is used to indicate whether a stock is oversold or undersold.
Generally speaking, an RSI above 70 means a stock is strongly bought; and an RSI below 30 indicates that it’s strongly sold.
An RSI above 80 meanwhile is extremely bought, and an RSI below 20 is extremely oversold.
10 ASX small caps with RSI over 70:
(data from Commsec)
Code Name 2 Day RSI 9 Day RSI 14 Day RSI FML Focus Minerals Overbought Overbought — BCM Brazilian Critical Minerals — Overbought — OBM Ora Banda Mining Overbought Overbought Overbought UOS United Overseas Overbought Overbought — STK Strickland Metals Overbought Overbought Overbought SBM St Barbara — Overbought Overbought PNR Pantoro — Overbought Overbought AD1 AD1 Holdings Overbought Overbought — SP3 Spectur Overbought Overbought — AX8 Accelerate Resources — Overbought —
Brazilian Critical Minerals (ASX:BCM)
Puuling in outstanding recoveries of magnetic rare earth oxides (MREO), up to 83%, from phase 2 metallurgical testwork.
Recoveries achieved using standard weak ammonium sulphate leaching solution, pH 4, at ambient temperatures over low leach times of only 30 minutes duration.
Leachability response now confirms majority portion of the defined 82km2 of rare earth mineralisation contains ionic clays.
The remaining 107km2 of the Ema project remains undrilled and untested.
Accelerate Resources (ASX:AX8)
The Prinsep Lithium Project maiden drill program is rapidly advancing with Aboriginal Heritage and Ethnographic surveys confirmed.
Survey to cover full +1.8km strike extent of both the northern and southern mineralised lithium pegmatite trends where assay results up to 2.06% Li2O1 have been reported.
Program of Works are currently under assessment with the Department of Energy, Mines, Industry Regulation and Safety.
Drilling to commence immediately post final approvals.
The post Hot Money Monday: The Turtle Trading System is the most celebrated momentum strategy; here’s how it works appeared first on Stockhead.
