This Simple Stock Strategy Can Beat The S&P 500

Investing isn't easy. Contrary to the overnight success stories you might hear, like the GameStop frenzy, building wealth through the stock market requires a well-tested and automated strategy. Today, we'll delve into a proven strategy that can supercharge your portfolio. But first, let's understand the current market conditions.

Following market trends is crucial for maintaining a successful strategy. As of mid-2024, the S&P 500 has seen a 15% growth, with only one month in the red and a maximum drawdown of just three weeks in April. We're witnessing all-time highs driven by AI giants like Nvidia, which has surged 300% in the past year. Major tech players such as Microsoft, Apple, Google, and Amazon are also aggressively pushing their AI initiatives, evoking memories of the dot-com bubble.

First, let's choose the market or industry. Focusing on the top seven companies in the S&P 500, known for their consistent profitability, provides a solid foundation for this strategy. We’re not aiming to outperform the market; rather, we want to leverage the stability of these top companies.

For this example, we've chosen Apple ($AAPL) as they are a market leader in the tech industry. Their stock also has a predictable pattern, making it an ideal candidate for this strategy.

Next, we apply two simple moving averages (SMAs) – one over a 20-day period (in blue) and another over a 50-day period (in red). These SMAs help track stock movements, indicating whether a stock is trending above or below these averages.

Incorporate the Moving Average Convergence Divergence (MACD) indicator to your chart. This tool helps identify potential buy signals when the MACD line crosses above the signal line, suggesting an upswing. This is the area below the main chart, with 2 lines and a histogram.

For buying criteria, look for stocks that fall below both the 20-day and 50-day SMAs. Wait for the MACD line to cross above the signal line, indicating a potential upward trend. Ensure the stock is closing on a green day to confirm positive momentum.

In the below image, we can see where the strategy would direct us to buy Apple stock. In all three cases, the stock is below the 20-day and 50-day SMAs, and the MACD line crosses above the signal line. Each of this points in the last year have produced a positive return of anywhere from 10% to 40% gains.

With these steps, you have a solid framework for your strategy. However, drawing lines and using indicators is just the beginning. Validating your strategy against historical market conditions is essential. Using tools like the strategy builder in Prosperse, you can input these criteria, starting with the previous green candle, followed by the MACD crossover, and the condition where the stock is below the 20-day and 50-day SMAs.

I've gone ahead and populated these conditions into the Prosperse Backtesting tool, and the results are promising. The strategy has a strong win rate of 58%, and a Risk-Reward ratio of 1.4. This means that for every dollar you risk, you can expect to make $1.40 in return.

You can tweak the strategy by adjusting parameters such as stop-loss, take-profit levels, or testing it across different industries and companies. This flexibility allows you to optimize the strategy to suit your investment style.

Prosperse enables you to take these created strategies and test them against historical data, ensuring that your strategy is robust and reliable. You can also save your strategies as scanners that run 24/7 providing notifications on buy and sell signals.

For a more detailed guide on working directly with the Prosperse strategy builder, you can read our guides here.

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