@ChaitanyaC If you give a detailed attention towards this rank-based momentum portfolio, you would realise that since Sharpe returns are used, we are trying to avoid high volatility stocks, which can bounce up on some news and come in the list one week and go out of the list the very next week. Volatility is taken care of. Then there is a very high possibility that stocks like Anantraj might come in the list which are in a very secular uptrend and not volatile.
So what do you thin? When will such stocks go out of the rank? Mostly they will not have abrupt exit. They will slowly lose momentum over 6 months to 1 year and then go out of worst held rank.
Imagine , it came into your ranking list in July 2023 and till today it has given you upmove of 288% and now its downward spiral has started and suppose it goes out of ranking list in lets say march 2025, by giving out all the gains or substantial gains back…That would be very unfortunate, after seeing such high gains. And this will be the story for all the Sharpe-curated secular stocks. They will behave like good boys while going up as well as going down.
So to avoid giving out all the gains and to protect these profits, its more sensible to have a trailing stop-loss. This strategy is not written in Bible Or Gita or Kuran that we cant change it to protect our profits. We need not be at the mercy of stock price behaviour if we could protect the gains by just implementing a risk minimising feature. Also if you see it in that way, Worst held rank , meaning we are selecting top 20 stocks but not selling till it crosses 25th rank, is also a risk minimization feature only to avoid whipsaw…
Obviously when we sell the stocks , then can again re-bound and come into top list, but thats not a cause of concern. What I should be happy with is, I tried to protect my gains and I am able to do it.
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