InvestorQ : How do I create my own formula for trading?
Dhwani Mehta made post

How do I create my own formula for trading?

shivangi Arora answered.
3 years ago

There is nothing really magical about a magic formula in markets. It is simply a formula that has worked for you in the past, is based on sound business logic and delivered returns consistently in most market situations. When a formula works for you, there is nothing superstitious about it. It is just that it is probably a formula that is best suited to your market philosophy. Let me explain!

An investor in Delhi had succeeded by consistently buying capital goods at every dip. A valuation of 10-12 P/E was an attractive level for him. The formula worked wonders for him through the 2003-2006 periods. By 2008 he was deep in losses as he had continued to buy these capital goods stocks at P/Es of above 30. He literally got burnt in the downturn. Now for the solution!

His success formula was not buying capital goods stocks but buying them at an attractive P/E. We asked him to unwind his entire position and wait for the carnage to settle down. Around late 2008, we again got him into capital goods stocks at a P/E of around 9-10. The magic formula worked once again. He had recovered his loss and made a pile by 2010.