Disclaimer: It is not my intention with these posts to develop a fully-formed mechanical trading strategy (either for myself or for anyone else) to follow. What I am trying to do is to formalise some of the ad-hoc decisions and learnings I have made during my own trading and to explore, test, and understand their impact and effectiveness. Through that process I hope to learn experientially, and to improve my own trading outcomes as a result.
Although I am primarily doing this for my own education, I find that doing it in the form of a post for others to potentially read really helps me to structure my thoughts and to maintain some rigour. I then choose to share them in the hope that they may also be of some interest to someone else, and to contribute to the Stockopedia community and collective knowledge base that I have personally gained so much from.
In my first post in this series, Part 1: Some Analysis of 2020 Using Back Testing and Stockopedia Rankings in a Breakout Strategy, I introduced my Quality Breaking Out (QBO) Strategy and back testing approach, and analysed its performance in 2020 through the COVID slump.
In the second, Part 2: Is Momentum More Profitable Than Quality?, I explored the Stockopedia ranking based primary selection criteria for the Tradeable World.
In this post I’ll build on Part 2 and look at the size and liquidity elements of the QBO Tradeable World definition.
Key findings:
- The majority of price movement occurs at the lower end of the MarCap range
- Large price movements (in both directions!) are very biased towards Micro and Small caps
- Liquidity, not MarCap, is the most significant factor in the strategy performance
Background and Approach
I had originally intended to cover MarCap and liquidity in separate posts (hence the 'and' in the title) to try to keep the posts shorter. However in truth, MarCap, Spread, and Liquidity are all a bit tangled up in my mind so I wanted to try to untangle them and to determine which (if any) were the most significant factors.
When I originally started working on the QBO Strategy I formed a view that Micro Caps could be a 'problem', as the majority of big losers I saw in testing (and in my own trading) were Micro Caps. Subsequent testing confirmed…
