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High Probability ETF Trading
- Thread starter RobtF
- Start date
What about your exit strategy? Do you use stop loss? whehn will you take profit for win trades?
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...
Quote from vikana:
Just curious: Where do you get this criteria from?
To "give a bit" in return, here is another reasonable criteria, imo
average-trade - stdev(all trades) > 0
A variation of signal/noise ratio
You can see it and other equations here:
http://en.wikipedia.org/wiki/Statistical_significance
Dan
Quote from jaccker:
What about your exit strategy? Do you use stop loss? whehn will you take profit for win trades?
The complete set of rules for long/short trade initiation and exit are there. Because of no set stop, you will sometimes get whacked good in a trade, but that is the reason one shouldn't put their whole nut in a trade...matter of fact, no more than 5% of equity is ideal.
The OIH trade is currently under water at (2.6%), we'll see if it can close strongly tomorrow or if there is more pain.
QQQQ triggered a trade at the close yesterday at $34.53. Currently +0.5% and a decent day tomorrow would likely lead to an exit above $35.
Thanks!
However, I think your system is very likely trigger several continuous long/short signal. Let's say, if QQQQ down more tomorrow, and another long signal will be triggered, what will you do? You follow the signal and double long or you just ignore the signal.
However, I think your system is very likely trigger several continuous long/short signal. Let's say, if QQQQ down more tomorrow, and another long signal will be triggered, what will you do? You follow the signal and double long or you just ignore the signal.
Quote from bentedges:
The complete set of rules for long/short trade initiation and exit are there. Because of no set stop, you will sometimes get whacked good in a trade, but that is the reason one shouldn't put their whole nut in a trade...matter of fact, no more than 5% of equity is ideal.
The OIH trade is currently under water at (2.6%), we'll see if it can close strongly tomorrow or if there is more pain.
QQQQ triggered a trade at the close yesterday at $34.53. Currently +0.5% and a decent day tomorrow would likely lead to an exit above $35.
Quote from jaccker:
Thanks!
However, I think your system is very likely trigger several continuous long/short signal. Let's say, if QQQQ down more tomorrow, and another long signal will be triggered, what will you do? You follow the signal and double long or you just ignore the signal.
Depends on my bias and the market dynamics at that point in time. I actually missed the signal on this one so bought it a bit higher this morning, sold for a small loss, then bought it back this afternoon thinking 'they' would try to ramp it back to 880 SPX resistance at the close. I punted most of it, so am now left with a tiny position and will let the chips fall where they may based on the strategy. And yes, am holding OIH as well and hoping to get out with a decent exit within next day or two.
One tidbit I will give away in regards to Connors' book is their TPS strategy. I mention it because what you just described is basically the strategy. Sort of an averaging down thing putting on a certain percentage after each signal is fired. Basically a way of saying, "If the trade goes against you further, add 'x' percentage to the trade.
Just caught this thread tonight and read up on all the posts.
Bentedges is dead on with what he has posted. This strategy is not for hitting home runs but it does grind out profits. The ETF strategy does beat the market over the long term while only putting your money in the market for short periods of time. Alot of it is about sitting on the sidelines and executing your trades when you have the setups(edges).
This method is not for adrenaline junkie daytraders (which is the camp I originally came from). It's more for waiting patiently and placing your bets when you have high probability setups. Very similar to card counting in blackjack.
As Bentedges stated it is a proven profitible strategy but if you only apply it to ETFs (which Connors does) it will keep you (sometimes) weeks without a setup.
For quicker setups I also apply these strategies to stocks that I monitor but I execute when I have much more extreme indicators than the typical ETF strategies.
I tend to tweek the strategies and trade stocks in my prop account with these methods (and my own added) and I tend to trade the more patient ETF setups in my IRA and safer money.
Overall I endorse the book and Conners but its not for the guy that only daytrades. It is very viable though for trading bigger portfolios as ETFs are very liquid.
Also you must be very disciplined and allocate capital properly and consistantly the same but it is a viable strategy.
Bentedges is dead on with what he has posted. This strategy is not for hitting home runs but it does grind out profits. The ETF strategy does beat the market over the long term while only putting your money in the market for short periods of time. Alot of it is about sitting on the sidelines and executing your trades when you have the setups(edges).
This method is not for adrenaline junkie daytraders (which is the camp I originally came from). It's more for waiting patiently and placing your bets when you have high probability setups. Very similar to card counting in blackjack.
As Bentedges stated it is a proven profitible strategy but if you only apply it to ETFs (which Connors does) it will keep you (sometimes) weeks without a setup.
For quicker setups I also apply these strategies to stocks that I monitor but I execute when I have much more extreme indicators than the typical ETF strategies.
I tend to tweek the strategies and trade stocks in my prop account with these methods (and my own added) and I tend to trade the more patient ETF setups in my IRA and safer money.
Overall I endorse the book and Conners but its not for the guy that only daytrades. It is very viable though for trading bigger portfolios as ETFs are very liquid.
Also you must be very disciplined and allocate capital properly and consistantly the same but it is a viable strategy.
Quote from reversiontrader:
Just caught this thread tonight and read up on all the posts.
Bentedges is dead on with what he has posted. This strategy is not for hitting home runs but it does grind out profits. The ETF strategy does beat the market over the long term while only putting your money in the market for short periods of time. Alot of it is about sitting on the sidelines and executing your trades when you have the setups(edges).
This method is not for adrenaline junkie daytraders (which is the camp I originally came from). It's more for waiting patiently and placing your bets when you have high probability setups. Very similar to card counting in blackjack.
As Bentedges stated it is a proven profitible strategy but if you only apply it to ETFs (which Connors does) it will keep you (sometimes) weeks without a setup.
For quicker setups I also apply these strategies to stocks that I monitor but I execute when I have much more extreme indicators than the typical ETF strategies.
I tend to tweek the strategies and trade stocks in my prop account with these methods (and my own added) and I tend to trade the more patient ETF setups in my IRA and safer money.
Overall I endorse the book and Conners but its not for the guy that only daytrades. It is very viable though for trading bigger portfolios as ETFs are very liquid.
Also you must be very disciplined and allocate capital properly and consistantly the same but it is a viable strategy.
Thank you, ReversionTrader. You said exactly what many always talk about and look to do in this game - find an edge, sit on your hands until that edge presents itself, then have the discipline to execute on that edge.
FWIW, the OIH trade was closed today at $91.50, yielding a loss of (1.2%.) The QQQQ's never were able to jump that $35 hurdle and that trade is still in play. They closed at $34.77, which is an unrealized gain of 0.7%.
One thing to note on this (and can be applied to other short-term strategies) is the potential for time stops. While I didn't put it in the rules of the very simple 3%, 5-day strategy, I noticed that every trade that went beyond 7 trading days was a loser (8 occurrences.) If this one drags out, I plan to employ that time-based stop, as my current bias is that this pullback has further (perhaps much further) to go.
Can you tell me what software you used to run your back test?
A friend of mine actually bought the software from Connors (for like $3000) but is very happy he did so far according to his results he says.
A friend of mine actually bought the software from Connors (for like $3000) but is very happy he did so far according to his results he says.
As far as trading books go, this is by far the best one ever written on ETF's. They just came out with it in paperback on amazon if anyone is interested in trying out the strategies:
http://www.amazon.com/High-Probabil...=sr_1_2?ie=UTF8&s=books&qid=1269964764&sr=1-2
I highly reccomend it to both noobs and experienced. Solid info
***Rated one of the Top 10 Investing & Trading Books of 2009 by SFO Magazine***
Here is the synopsis from Amazon: I wonder if we can get Elite to review the book??
Are you worried about the risks associated with the stock market? Are you tired of seeing your returns diminish month after month, quarter after quarter?
Are you looking to potentially increase your trading profits AND reduce your risk level? How do you do this? With ETFs.
The First Quantified Book on Trading ETFs
3 Reasons Why You Should Be Trading ETFs
1. ETFs Are Safer Than Stocks - There is less single stock corporate risk as ETFs are a basket of underlying securities. With multiple securities, you aren t subject to the wide array of risk including corporate scandals, after market earning reports, and other factors that affect individual stocks.
2. Trade ETFs On Both The Long And Short Side - This enables the opportunity to profit in both rising and declining markets.
3. Trade ETFs With or Without Leverage - Many traders like the idea of getting added leverage in their trading and the newly released leveraged ETFs have seen tremendous volume growth as active traders have gravitated to them.
What You Will Learn From Reading High Probability ETF Trading.
In this book, you will learn 7 ETF strategies that have been tested on a universe of 20 of the more liquid ETFs including the SPYs and QQQQs. Each strategy was tested since the inception of the trading of each ETF.
How Well Have the Strategies Performed?
The strategies you will learn resulted in over 80% winning trades since October 2008 in the Larry Connors' Daily Battle Plan.
In fact, from October 2008 to February 2010, these strategies have resulted in following results in the model portfolio:
60 ETF Set-Ups
49 Winning Trades
82% Correct
How Do the Strategies Work?
You will identify the signals at the close of the day. Then, you simply place your orders and exit when the signal occurs, usually 3 to 7 trading days later. That's it!
Are the Strategies Difficult to Learn?
No! In fact all have only a few rules and all the strategies can be learned in an evening. You'll be able to apply the strategies to the next trading day.
Do You Have Strategies for Shorting ETFs?
Yes. Every strategy is designed to be traded both on the long side (especially for bull markets) and the short side (especially for bear markets).
http://www.amazon.com/High-Probabil...=sr_1_2?ie=UTF8&s=books&qid=1269964764&sr=1-2
I highly reccomend it to both noobs and experienced. Solid info
***Rated one of the Top 10 Investing & Trading Books of 2009 by SFO Magazine***
Here is the synopsis from Amazon: I wonder if we can get Elite to review the book??
Are you worried about the risks associated with the stock market? Are you tired of seeing your returns diminish month after month, quarter after quarter?
Are you looking to potentially increase your trading profits AND reduce your risk level? How do you do this? With ETFs.
The First Quantified Book on Trading ETFs
3 Reasons Why You Should Be Trading ETFs
1. ETFs Are Safer Than Stocks - There is less single stock corporate risk as ETFs are a basket of underlying securities. With multiple securities, you aren t subject to the wide array of risk including corporate scandals, after market earning reports, and other factors that affect individual stocks.
2. Trade ETFs On Both The Long And Short Side - This enables the opportunity to profit in both rising and declining markets.
3. Trade ETFs With or Without Leverage - Many traders like the idea of getting added leverage in their trading and the newly released leveraged ETFs have seen tremendous volume growth as active traders have gravitated to them.
What You Will Learn From Reading High Probability ETF Trading.
In this book, you will learn 7 ETF strategies that have been tested on a universe of 20 of the more liquid ETFs including the SPYs and QQQQs. Each strategy was tested since the inception of the trading of each ETF.
How Well Have the Strategies Performed?
The strategies you will learn resulted in over 80% winning trades since October 2008 in the Larry Connors' Daily Battle Plan.
In fact, from October 2008 to February 2010, these strategies have resulted in following results in the model portfolio:
60 ETF Set-Ups
49 Winning Trades
82% Correct
How Do the Strategies Work?
You will identify the signals at the close of the day. Then, you simply place your orders and exit when the signal occurs, usually 3 to 7 trading days later. That's it!
Are the Strategies Difficult to Learn?
No! In fact all have only a few rules and all the strategies can be learned in an evening. You'll be able to apply the strategies to the next trading day.
Do You Have Strategies for Shorting ETFs?
Yes. Every strategy is designed to be traded both on the long side (especially for bull markets) and the short side (especially for bear markets).