Stock Trading Strategy – Backtest, Core System, and Performance Overview (2024)

Many people view stocks as a way to make money, and certainly, stock trading has become one of the most popular types of trading since the emergence of the Covid-19 pandemic and meme stocks. Even before then, its popularity among retail investors grew with the emergence of commission-free stock trading platforms, such as Robinhood. But what is a stock trading strategy?

The stock trading strategy is a method of trading whereby a trader trades only one stock at a time. That is, at any given point, the trader focuses all their energy on only one stock (say Tesla or Apple) and tries to learn and know everything about the stock’s fundamentals and technical analysis, which includes the factors that move the stock and the pattern of its price movement.

In this post, we take a look at the single stock trading strategy. We make a backtest at the end of the article.

What is a single stock?

A stock is a type of investment that represents an ownership share in a company. The unit of a stock is known as a “share.” A share of a stock entitles you to a proportion of the company’s assets and profits, and how many shares you own determines how much you get. That is, if you buy 150 shares of a company, you would own a portion of the company equivalent to the percentage the 150 shares offer you.

You buy and sell shares on an exchange where buyers and sellers trade them via stock brokers. In today’s world, this buying and selling are facilitated with electronic networks via trading platforms.

There are two different ways to make money from stocks. One way is through the price appreciation of the stock, which is the main target of short-term traders (day traders and swing traders). The other way is to make money through dividends, which are the profits of the company paid to the shareholders. But all in all, it all come from the profits form the underlying business.

Unlike trading EFTs, mutual funds, or a portfolio of stocks, some traders focus on trading individual stocks and may even choose to trade a single stock. For example, a trader may choose to trade only Apple, Amazon, or Tesla, as that would offer them the opportunity to learn and know everything about the stock’s fundamentals and the pattern of its price movement (technical analysis).

However, while individual stocks can have unlimited growth potential, they also have the potential for huge losses. The company can go bankrupt at any time, and the trader could very likely lose their entire investment.

History has shown that even the biggest and apparently successful companies can become insolvent at any time. This is why trading a single stock can be very risky. Most people recognize Apple as a successful company, and it is, but many have forgotten the problems that persisted for decades before iPods, iPhones, and iPads took off.

As a result, most investors try to mitigate this risk by having a diversified portfolio of stocks, and many use tools like mutual funds, ETFs, managed accounts, or variable annuities to achieve this. This is the most rational way to invest for 99% of retail clients.

Nonetheless, some traders like to be specialists and focus all their attention on a single stock at a time. Such traders use the single stock trading strategy.

What is a single stock trading strategy?

The single stock trading strategy is a method of trading whereby a trader trades only one stock at a time. That is, at any given point, the trader focuses all their energy on only one stock (say Tesla or Apple) and tries to learn and know everything about the stock’s fundamentals and technical analysis, which includes the factors that move the stock and the pattern of its price movement.

With this type of trading, the trader studies whichever stock they have chosen and take a long or short position on the stock, as their trading strategy dictates. Their trading style could be day trading, swing trading, or even position trading, but they only trade that one stock they know about. If, for any reason, they ever want to switch to a new stock, they first study the new stock, switch to it, and trade only that stock.

As with any other stock trading strategy, there are different ways they can gain exposure to the stock they want to trade. One method is to trade the stock directly on the equity market through their broker, but for those who want to day-trade on the US equity market, the method is subject to the pattern day trading rule of the FINRA. Another way is to trade stock futures if they have the capacity to do so.

Some retail traders, especially outside the US, can trade the stock CFD. In the US, a new way to trade leveraged stocks just came on board in July 2022 — single stock ETFs.

But the key thing in using the stock trading strategy is to determine the stock to trade. Some of the factors to consider in choosing the right stock include:

• Liquidity: The stock must have enough liquid, as measured by trading volume and number of transactions.
• Volatility: The stock must have good volatility
• Good price movements: The price must not be spiking about. It should have sizeable movements in any direction.
• Trade setups: The stock chart must have whatever the trader considers a trade setup, and the setup must occur regularly and reasonably frequently.

Is buying single stock a good idea?

No, we don’t think it is a good idea to trade only one stock because of the risks involved. No matter how solid a company seems to be, it can become insolvent at any time for one reason or the other — poorly managed debt, a court case, or an issue with the regulators leading to the revocation of its license. Any of such issues can send the price to an abyss in no time.

Imagine having all your capital in one stock and it loses 90% of its value. Don’t even think that with the right knowledge, a trader that specializes in one stock can pick the signs before it happens. Any stock can tank at any time without any prior sign of company or industry hiccups — this is called a black swan event. And a stop loss order may not help as the price might gap far below the stop loss level.

The risks associated with trading a single stock are too many for any retail trader. Institutions and big funds which can have many different traders trading for them can choose to have a specific trader for each major stock who would focus only on the assigned stock, and that would be fine because all together, they have a diversified stock portfolio.

But a retail trader who trades all by himself would not be able to do that, so trading a single stock is a bad idea for retail traders. The thing for a retail trader, whether a discretionary or a systemic trader, is to trade different stocks and even trade other securities as well. This way, they can have a diversified portfolio and use diversification to manage risks.

The fact is that most public listed companies ends up with poor returns. That is documented by ample research, for example by Hendrik Bessembinder that went through the performance of all listed stocks from 1926 to 2015. His findings are somewhat depressing:

Between 1926 and 2015, only 43% of equities carried a return higher than Treasury Bills. Only 86 of 26 000 stocks made half the return.

Please keep this in mind when you fall in love with a stock’s business model!

Can you day-trade one stock only?

Yes, you can. In fact, some day traders do follow a stock trading strategy to different degrees. There are those who specialize in only one stock and trade only that stock every day.

On the other hand, there are those who have a universe of stocks they trade but select only one of them to trade each day. That is, the trader may have a universe of 20 stocks in their watchlist, and each day, they would select, out of those 20 stocks, only one stock that has the best trading setup and trade for the day.

Both methods can be limiting in many ways, as they can make scaling difficult, and if you try to scale by increasing position size, you may be exposing your capital to huge risks because anything can happen in the market at any time. Day-trading only one stock means that if the stock is hit hard by any market event or a bad actor, it can seriously affect your trading capital. Please read this article about scalable vs. non-scalable.

As we explained earlier, trading institutions can practice the stock trading strategy with each of their traders and still end up with an overall diversified portfolio, but that is not possible for a retail trader. So, as a retail day trader, you are better off trading many stocks at a time as that would offer you a diversified portfolio. the easiest way to achieve that is to use quantified strategies and have trading algos that trade multiple stocks for you at all times. You can even trade different strategies and also trade on different timeframes at the same time.

Can you swing-trade one stock only?

Yes, you can swing-trade one stock, but you don’t want to do that. First, depending on your trading setup, it may be hard to find trading opportunities as much as you would like because, with swing trading, you trade on a higher (daily or H4) timeframe.

• Best time frame candle for intraday trading
• The best time frame for swing trading

Trading only one stock means that you always have to wait for the stock to develop what you consider a trade setup before you can open a trade, and that may not happen quite frequently, whereas if you have many stocks, you are more likely to find your trade setup out of the many different stocks on your watchlist.

Apart from the issue of finding trade setups as often as you would like, trading only one stock comes with a lot of risks, especially for a retail trader. Stock trading is a very risky venture on its own, but putting all your eggs in one basket makes it even more risky. Swing-trading only one stock implies putting all your capital in one stock, and if anything happens in that market, you can lose a huge chunk of your capital or even all of it.

It is always better to trade many stocks as a swing trader. That would mean having a diversified portfolio, which helps you to reduce risk — a loss in one stock would be offset by the gain in another stock.

Examples and a list of single stock trading strategies

There are different strategies for trading single stocks. Here are some of the common stock strategies.

1. Hundreds of trading and investing systems (and strategies)
2. OHL Trading Strategy
3. Opening Range Breakout Strategy
4. Expiry Trading Strategies
5. President Election Cycles Stocks
6. 52-Week High Trading Strategy
7. Breakout trading strategies
8. Rubber Band Strategy
9. MACD-histogram trading strategy
10. Lower highs and lower lows pattern (trading strategy)
11. Higher highs and higher lows pattern (trading strategy)
12. NR7 trading strategy – The Narrow Range 7

If you’d like to have a look at our premium (and paid) strategies, you find them here:

The best strategies can be found in our….

Strategy Shop

Backtested trading strategies

Yes, I’d like to make money!

Now, let’s take a look at the second strategy, the OHL strategy. It is a day trading strategy that uses the Open, High, and Low prices of the first five minutes of the trading day to determine a trade entry signal. So, you use the five-minute or 1-minute time frame to trade the strategy. Here is how the signal works:

• Buy signal: You have a buy signal if the Open price = Low of the first five-minute candlestick of the trading day. In this case, you go long with the opening of the next price bar.
• Sell signal: You have a sell signal if the Open price = High of the first five-minute candlestick of the trading day. In this case, you go short with the opening of the next price bar.

For your stop loss, place it beyond that open price. Your take profit target should be 2x the stop loss to get a 2:1 reward/risk ratio or you close your trade at the end of the trading day if you want to. See the chart below:

Pros and cons of single stock trading strategies

There are many merits and demerits of using the single stock trading strategy. One of the merits is that stocks are generally more likely to be inefficient than other markets, so each stock presents some good trading opportunities. The reason for the inefficiency is that fewer people trade stocks compared to other markets, and they are more exposed to aggressive sellers and buyers driving prices up and down. Another benefit is that focusing on one stock at a time allows the trader to learn everything that moves the stock, including the fundamental and technical factors, and the trader may get to master the pattern of the stock’s movement.

On the flip side, however, the single stock strategy exposes the trader to huge risks, as it implies putting all eggs in one basket. Any unforeseen adverse price movement (normally, there are many of such) can result in huge losses, unlike when one is trading many stocks where a loss in one stock may be offset by a gain in another stock. It is always better to trade many stocks than to trade only one stock.

Is Warren Buffett a single stock investor?

Warren Buffett is famous for his his views on “diworsification”, but at the same time, Buffett recommends retail customers to invest in S&P 500 and keep a little in bonds – the 90/10 portfolio.

But he’s also a proponent of having a concentrated portfolio. As of writing, Berkshire Hathaway’s position in Apple is 47% of their stock portfolio! This is a pretty remarkable bet, but it shows his confidence in the company.

Single stock trading strategy – backtest and performance

It’s easy to backtest a single stock trading strategy: You just download data for the relevant ticker, and calculate the returns.

• How do you perform a backtest?

That said, there is a problem inherent in all backtests that involves stocks: survivorship bias. Traders and investors tend to backtest companies that are alive and kicking today, but ignore those that were alive and kicking ten years ago but went bankrupt or ended up as penny stocks. Your backtest is likely to be much better than in real life trading because of this. This is an aspect very few think about, but it applies to all aspects of life as well. We tend to see the winners and the successes, not the “losers” (they never show up, do they?).

• Survivorship bias examples

Single stock trading strategy portfolio

We believe it’s not a wise idea to specialize in one single stock – the risk is too high and you’ll never have much clue about the future price movement anyway.

As a trader, you can use the law of large numbers: make some logical trading rules, backtest them, and trade a portfolio of stocks. Even better, you need a portfolio of stock trading strategies.

Let’s give you an example of a stock strategy:

Recently, we published a specific trading strategy for our members:

• Unveiling the Best Trade Entries: Backtest Comparison Reveals Surprising Results!

These are the trading rules for when to buy a position:

• The stock needs to be part of S&P 500 index
• Trading rule 1
• Trading rule 2
• Position size: 10% each, the maximum number of simultaneous positions is 10
• If there are more signals than open slots, ranking based on the 52 weeks rate of change is applied
• Trading rule 3 defines when to sell

As you can see, it’s not a complex strategy, the variables are few, and it’s easy to backtest such a trading strategy. The equity curve looks like this:

You started with 100 000 in year 2000 and have 4.5 million today!

Even better is that you have relatively small and short-lived drawdowns along the way:

Depending on when you exit or sell your position, we can summarize the backtests in a table (from the year 2000 until today):

The first column shows the results when we enter our trades at the open the day after the signal. We are only trading liquid S&P 500 companies, and slippage should be minimal (we have included $2 for commissions for each trade).

The trading rules are yours for a tiny amount if you become a Bronze member!

We believe the quantified approach described above is a much better way to make money than to try to specialize in a single stock.

Only if you really know what you are doing should you trade or invest in one single stock:

If you are investing for long-term, buy an index or a portfolio. If you are trading, quantify your strategy, backtest it, and trade many liquid stocks as a portfolio, exactly as we showed in the example above. Don’t try to be a hero – spread the risk and minimize it.

FAQ:

Why do some traders focus on trading a single stock?

Some traders focus on a single stock to deeply understand its dynamics, both fundamentally and technically, enabling them to make more informed trading decisions.

How can I backtest a single stock trading strategy?

Backtesting involves downloading historical data for the relevant stock and analyzing returns based on predefined trading rules.

What are some common trading strategies for single stocks?

Examples include the 52-Week High Trading Strategy, Breakout Trading Strategies, Rubber Band Strategy, MACD-Histogram Trading Strategy, and others listed in the content.