Quote from bentedges:
In a previous post I stated I would show a simple strategy that can give one an edge based off of ideas from other's strategies. One of the great things about learning from others is that it helps you to think and branch out into other ideas that very well may be profitable (provided one is willing to put in the time, effort and energy.)
A few things to note that I feel are important:
1. The KISS principle. Simple IS better. If you have 47 parameters or some such nonsense, the strategy will NOT be robust and there is a strong possibility it will blow up at some point in the future.
2. Generally speaking, a strategy should work across multiple time frames and securities (with minor adjustments.) This goes back to #1 and being a robust system. For example, if one uses a moving average in their strategy of say, 150 days, but they then try to optimize it by going to 168 days and the results are a bit better, but then they test 135 days and the system deteriorates badly, then they need to look at the structure of the strategy and if it is sound.
3. Risk management, and in particular, position sizing, are very important in the big picture. A guy that throws his whole wad into one great strategy, or for that matter into each trade, is bound to blow up. The inevitable drawdown will kill them, which leads me to...
4. The toughest thing with any strategy is following the rules and not letting emotions or ego get involved. When I was working at a hedge fund some years back, there was a dedicated programmer/trader who found a great system to trade the Q's. (Aside - he used to work for Ned Davis Research, and has since returned to that organization. This is a research firm that funds pay tens of thousands to get their insight, but I digress...) Anyway, so this system performed well in the backtesting and out-of-sample testing, so they started trading it. Long story short, after a few months it went into the inevitable drawdown with like 4 losing trades in a row. One of the principals said, "We're not taking any more signals from that system." Yep, you guessed it - the strategy went on a fantastic run that would've (helped) make their year. Again, if one has did the work, it's time to check the emotions and ego at the door. All too often a trader wants to be 'right' when all they should worry about is trading with discipline. If the strategy is sound, the profits will follow.
Now, onto this very simple system that anyone can follow without having to be a programmer. It doesn't make many trades, but when it speaks, I listen. Again, it isn't the holy grail, but as part of the bigger picture in the context of a total, diversified long/short portfolio, it will add alpha. Oh, and yes, this did come from ideas from others...in particular, Zweig and Connors. This strategy was designed for ETF's, but is able to work with individual stocks...I personally use other strategies for stocks. And I would be surprised if something similar hasn't already been put in the public domain.
RULES for LONGS:
1. The closing price is ABOVE the 200 day moving average.
2. Enter the trade on the close when the price is 3% or more BELOW the 5 day moving average.
3. Exit the trade at the close when the closing price is ABOVE the 5 day moving average.
RULES for SHORTS:
1. The closing price is BELOW the 200 day moving average.
2. Enter the trade on the close when the price is 3% or more ABOVE the 5 day moving average.
3. Exit the trade at the close when the closing price is BELOW the 5 day moving average.
Very simple, right? And purely price structure with no fancy indicators necessary.
Here are the results for some commonly traded ETFs going back to their inception (at least 5 years of data.) :
QQQQ
# Trades = 109
Winning Trades = 83 (76.15%)
Losing Trades = 26
Long Avg Win = 2.44%
Long Avg Loss = (3.26%)
Long Combined Avg = 1.07%
Short Avg Win = 3.82%
Short Avg Loss = (6.09%)
Short Combined Avg = 1.47%
Largest Win = 12.89%
Largest Loss = (21.86%) (DIVERSIFY!)
Max Consecutive Winners = 12
Max Consecutive Losers = 3
Winning Avg Held = 3.14 Days
Losing Avg Held = 7.15 Days
Profit Factor = 2.17
SPY
# Trades = 29
Winning Trades = 23 (79.3%)
Losing Trades = 6
Long Avg Win = 2.7%
Long Avg Loss = 0 - no losers
Long Combined Avg = 2.7%
Short Avg Win = 3.39%
Short Avg Loss = (4.36%)
Short Combined Avg = 1.18%
Largest Win = 11.18%
Largest Loss = (11.05%)
Max Consecutive Winners = 5
Max Consecutive Losers = 1
Winning Avg Held = 3.09 Days
Losing Avg Held = 9.0 Days
Profit Factor = 2.71
EEM
# Trades = 35
Winning Trades = 25 (71.4%)
Losing Trades = 10
Long Avg Win = 2.32%
Long Avg Loss = (3.72%)
Long Combined Avg = 0.19%
Short Avg Win = 5.5%
Short Avg Loss = (3.91%)
Short Combined Avg = 3.41%
Largest Win = 20.34%
Largest Loss = (8.39%)
Max Consecutive Winners = 5
Max Consecutive Losers = 4
Winning Avg Held = 3.04 Days
Losing Avg Held = 6.7 Days
Profit Factor = 2.90
GLD
# Trades = 15
Winning Trades = 11 (73.3%)
Losing Trades = 4
Long Avg Win = 2.46%
Long Avg Loss = (1.87%)
Long Combined Avg = 1.59%
Short Avg Win = 4.36%
Short Avg Loss = (2.38%)
Short Combined Avg = 1.66%
Largest Win = 4.71%
Largest Loss = (3.61%)
Max Consecutive Winners = 3
Max Consecutive Losers = 1
Winning Avg Held = 3.64 Days
Losing Avg Held = 6.50 Days
Profit Factor = 3.79
SMH
# Trades = 85
Winning Trades = 63 (74.1%)
Losing Trades = 22
Long Avg Win = 2.47%
Long Avg Loss = (1.88%)
Long Combined Avg = 1.31%
Short Avg Win = 4.20%
Short Avg Loss = (4.04%)
Short Combined Avg = 2.08%
Largest Win = 10.07%
Largest Loss = (23.05%)
Max Consecutive Winners = 10
Max Consecutive Losers = 2
Winning Avg Held = 2.78 Days
Losing Avg Held = 5.45 Days
Profit Factor = 3.02
OIH
# Trades = 72
Winning Trades = 49 (68.1%)
Losing Trades = 23
Long Avg Win = 2.20%
Long Avg Loss = (2.72%)
Long Combined Avg = 0.81%
Short Avg Win = 4.45%
Short Avg Loss = (5.74%)
Short Combined Avg = 0.96%
Largest Win = 17.91%
Largest Loss = (15.34%)
Max Consecutive Winners = 6
Max Consecutive Losers = 2
Winning Avg Held = 3.35 Days
Losing Avg Held = 6.43 Days
Profit Factor = 1.69
I Included OIH because a trade just triggered on the close on the last day of the week (Thursday.) It is a long trade, and the closing price of OIH was $92.62. Given that the last 2 trades in OIH were losers, I am thinking this one stands a reasonable possibility of coming in the black...
