Is relying only on large cap stocks a reasonable trading strategy?

External question — Personal Finance Stack Exchange Author: N N Original post: https://money.stackexchange.com/questions/159278 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I have worked on a simple strategy that looks for the stock with the largest cap, buys it, keeps it until it has a 2% increase, and then repeats the process again. This is a simple strategy but applying it to 20 stocks with the largest volume from 2004 to 2023 has an annual rate of return of 27%. Here are all the transactions https://sites.google.com/view/simpletrading2023/home Can we conclude from this backtest that the strategy is reliable?

External answer — Personal Finance Stack Exchange Author: mhoran_psprep Original post: https://money.stackexchange.com/a/159298 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In a comment I asked if you included taxes, charges for each trade, and the amount you missed by frequently exiting the market. You asked for clarification regarding exiting the market. In the data sheet you showed that you went long stretches where you sold all your shares a company because it went up 2%, and then the next day reinvested all your money back into the same company. Sometimes doing that was a good thing: Purchased 2830.00 of AAPL at price $0.51 on 2004-06-24. Total Invested: $1456.20. Remaining Budget: 0.50. Total Budget: 1456.71 Sold 2830.00 of AAPL at price $0.52 on 2004-06-28. Total Invested: $0.00. Remaining Budget: $1485.83. Total Budget: $1485.83 Purchased 3017.00 of AAPL at price $0.49 on 2004-06-29. Total Invested: $1485.72. Remaining Budget: 0.12. Total Budget: 1485.83 Sold 3017.00 of AAPL at price $0.50 on 2004-06-29. Total Invested: $0.00. Remaining Budget: $1515.55. Total Budget: $1515.55 Purchased 3031.00 of AAPL at price $0.50 on 2004-06-30. Total Invested: $1515.42. Remaining Budget: 0.13. Total Budget: 1515.55 Sold 3031.00 of AAPL at price $0.51 on 2004-07-15. Total Invested: $0.00. Remaining Budget: $1545.86. Total Budget: $1545.86 You bought at $0.51, and several transactions later you sold at $0.51 but because you didn't own own the shares when the small drop occurred from $0.52 to $0.49 you made almost $90.00. That worked out for you. Sometimes you missed a jump in price: Purchased 2909.00 of AAPL at price $0.62 on 2004-10-07. Total Invested: $1810.88. Remaining Budget: 0.28. Total Budget: 1811.16 Sold 2909.00 of AAPL at price $0.63 on 2004-10-14. Total Invested: $0.00. Remaining Budget: $1847.38. Total Budget: $1847.38 Purchased 2680.00 of AAPL at price $0.69 on 2004-10-15. Total Invested: $1846.93. Remaining Budget: 0.46. Total Budget: 1847.38 Sold 2680.00 of AAPL at price $0.70 on 2004-10-18. Total Invested: $0.00. Remaining Budget: $1884.32. Total Budget: $1884.32 Purchased 2551.00 of AAPL at price $0.74 on 2004-10-19. Total Invested: $1884.16. Remaining Budget: 0.16. Total Budget: 1884.32 Sold 2551.00 of AAPL at price $0.75 on 2004-10-27. Total Invested: $0.00. Remaining Budget: $1922.00. Total Budget: $1922.00 You missed two jumps in this sequence of trades: $0.63 to $0.69 and again from $0.70 to $0.74. If you had simply bought at $0.62 and sold at $0.75 you would have made more money. Of course you don't know this before the fact. Looking just at your first data sheet you bought and sold nothing but AAPL from: Purchased 3040.00 of AAPL at price $0.33 on 2004-01-05. Total Invested: $999.90. Remaining Budget: 0.10. Total Budget: 1000.00 until: Sold 2462.00 of AAPL at price $0.81 on 2004-10-29. Total Invested: $0.00. Remaining Budget: $1999.63. Total Budget: $1999.63 You essentially doubled your money. Good job. But.... If you had simply bought at $0.33 and sold at $0.81 you would have turned the $1000 into $2462. You would have made $460 more. This reminds me of an earlier question: Is it true that, "just ten trading days represent 63 per cent of the returns of the past 50 years"? from my answer to that other question: I did find that a similar phrase in an article on the motley fool website Time in the market, versus time out of the market J.P. Morgan Asset Management's 2019 Retirement Guide shows the impact that pulling out of the market has on a portfolio. Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. That's a significant difference for only 10 days over two decades! The JP Morgan study can be found on their website . Page 41 of the report has the information. The constant in and out of the market could mean you miss a significant chunk of the growth.