Quote from mag:
I created a one-trade-per-day strategy using candlestick indicators a long time ago.
The strategy played out like this:
1. Wait for a âmorning starâ or âevening starâ to occur on a daily chart of a group of stocks over $10 and with volume higher than a million.
2. Enter long for a morning star, short for an evening star right before the market close. (Before market close is important because then you capture over night price movement).
3. Close the position the following day right before close.
The strategy was profitable including slippage and commissions.
A couple of issues came up.
Interestingly, adding profit targets and stops made the system a loser.
Profit and loss swings of over 20% occurred.
Also, the strategy didn't put out too many trades per month and you had to be at your computer ready to place a trade at the end of every trading day (not too much screentime but still a commitment to a place and time every single day).
My mentor at the time told me you couldn't have a strategy that didn't have stops so I gave up on it. But it was a fun learning experience and very labor intensive considering I don't have backtesting software and instead had to learn and then program excel to backtest for me.
It showed me that all the indicators that you read about in books and on the internet aren't completely garbage. It's just that by themselves they aren't very strong (they're better than 50-50 when you put no constraints on them whatsoever). Since thatâs damn near impossible to trade, I moved on.
I bring this up because the coin-toss method doesnât involve any technical analysis.
Even a strategy of buying pullbacks to a 20 tic moving average is highly profitable under certain market conditions.
What are market conditions? Trends in price on a higher time frame than the one we are using to place trades.
Hereâs an example of a strategy where you buy dips to the 20 day moving average of the SP500 when the 20 day moving average is above the 50 day average and short pullbacks to the 20 day moving average when the 20 day moving average is below the 50 day average.
(Download excel worksheet â results on the far right)
As a few traders here pointed out, the market has had a bias to the upside since 2000. As a result the bullish strategy profited more than the bearish.
What is really interesting is that with the use of Bollinger band width (explained in the excel file), you can increase your average profit by nearly 100% with the bullish strategy.
What is even more impressive? Using the Bollinger band width with the bearish pullback strategy you go from losing an average of .75 points to a profit of 1.6 points per trade!
Market conditions (trends on a longer time frame) exist and technical analysis works.
EDIT
Saved the worksheet in the wrong format. Here's the results
Pullback Strategy (Bullish)
1. Enter long on pullback to 20 day
average (within 5 tics up or down)
when 20 day average is above
50 day average.
2. Entry is made at the close.
3. Exit is the following days close.
Results:
# of trades: 70
Profit in tics: 183.42
Average Result: 2.62
Highest Profit: 26.83
Highest Loss: -11.75
Pullback Strategy (Bearish)
1. Enter short on pullback to 20 day
average (within 5 tics up or down)
when 20 day average is below
50 day average.
2. Entry is made at the close.
3. Exit is the following days close.
Results:
# of trades: 25
Profit in tics: -19.37
Average Result: -.77
Highest Profit: 23.01
Highest Loss: -22.75
Pullback Strategy (Bullish)
Using Bollinger Band Width
1. Enter long on pullback to 20 day
average (within 5 tics up or down)
when 20 day average is above
50 day average and bollinger width
is between 10 and 20 or greater than
40.
2. Entry is made at the close.
3. Exit is the following days close.
Results:
# of trades: 45
Profit in tics: 217.93
Average Result: 4.84
Highest Profit: 35.55
Highest Loss: -19.63
Pullback Strategy (Bearish)
Using Bollinger Band Width
1. Enter short on pullback to 20 day
average (within 5 tics up or down)
when 20 day average is below
50 day average and bollinger width
is between 10 and 20 or greater than
40.
2. Entry is made at the close.
3. Exit is the following days close.
Results:
# of trades: 13
Profit in tics: 21.7
Average Result: 1.66
Highest Profit: 23.01
Highest Loss: -22.75
