Do Profit Targets Add Value to a Strategy?
My research suggests that profit targets improve results for trend-momentum strategies that trade ETFs. Note that performance improvements may differ for other strategies. This article will first show a trend-momentum setup on the chart. I will then provide some performance metrics for a basic strategy with and without a profit target. TrendInvestorPro (here) introduced a similar strategy this month and the final part will be posted next week.
Trend-momentum strategies require two components: an indicator to identify the trend and an indicator to rank performance. I am using the Trend Composite to identify the trend and Normalized-ROC to rank performance. The Trend Composite aggregates signals in five trend-following indicators. Normalized-ROC is the 200-day point change divided by 20-day ATR. You can read more about these indicators here. The chart shows the Technology SPDR (XLK) with a positive Trend Composite and a Normalized-ROC(200,20) of 6.63, which is one of the highest ranked ETFs in our universe.
Strategies that trade stocks also require a market timing mechanism. In bull markets, the idea is to buy the ETFs that are in uptrends and that have the highest rank. Buy the strongest. A sell signal triggers when a bear market starts or the Trend Composite turns negative.
In the absence of a sell signal, traders can also consider setting a profit target and exiting when hit. For example, sell when the ETF is up 10%. I put this idea to the test with a universe of 74 stock-based ETFs that have trading history back to 2007. The test ran from January 2007 until April 2023, which is 16+ years. The strategy without a profit target showed a Compound Annual Return of 8.36% and an Average Drawdown of 16.79%. The strategy with a 10% profit target generated a Compound Annual Return of 9.6% and an Average Drawdown of 14.42%. The Compound Annual Return was over 1% higher and the Average Drawdown was over 2% lower. A profit target improved performance for this strategy.
TrendInvestorPro introduced a similar strategy this month and the final part will be published next week. This strategy using a market timing mechanism, two trend indicators and a profit target to maximize performance. Click here for details and immediate access.
Normalized-ROC, the Trend Composite, ATR Trailing Stop and nine other indicators are part of the TrendInvestorPro Indicator Edge Plugin for StockCharts ACP. Click here to take your analysis process to the next level.