8 Down Days in a Row - Buy?
On one of the swing trading/mean reversion systems that I trade it had LLTC came up as a potential buy candidate. When I looked at the chart I noted that it had been down 8 consecutive days.
Gosh I love when that happens. In order to show you what a simple system based on this concept might do I created a script that I could backtest in Wealth-Lab.
The system parameters are as follows:
- Buy the open the day after 8 consecutive down days
- Exit when the price close is above the bar 2 bars ago
- No stop loss
That’s it. Now I know most people would consider this system lunacy based upon the lack of stop and buying such obviously weak positions. I ran this system on the present components of the SP-500 to see what sort of results we see. The system has some very promising aspects.
The parameters of the portfolio simulation where as follows:
- 10 position portfolio
- tested on the last 7 years of data
- $200,000 starting portfolio
- if there are more signals than available slots in the portfolio the system randomly selects enough positions needed to fill the portfolio
- .02 cents commission per share on buys and sells
The obvious backtest caveats should apply.
The system had 70% winners with the average winners being 3.45% and loser 4.17%
The system returned 17.96% annually with only 29% exposure.
The equity curve looks like this:
Drawdowns like this:
Annualized performance since 2003 has diminished as the level of volatility has subsided. Possibly this is a system that would do best in a rising ATR environment, such as we have experienced recently.
The list of stocks that would qualify today are…..
AMGN
FLR
HBAN
LLTC
PAYX
SOV
STI
Have a Great Day!
Dave Johnson
Tuesday, April 3 10:47 am
Just a quick question: what system are you using for backtesting? Thought you might find this interesting as well but I’m guessing you’ve seen it:
http://www.tigersharktrading.com/articles/6366/1/A-10-Day-Trading-System/Page1.html
Tuesday, April 3 11:37 am
I use WealthLab for backtesting. That link meshes with all my own and others research. Problem is it’s when the gut is most afraid to pull the trigger. As I used to say on the old blog - “It’s always THE top”
Thanks for stopping in Damian.
Tuesday, April 3 12:00 pm
Ah, building trust with a system is always tough! As the Turtles say - “we could publish the rules, but who would follow them?”
I actually like the idea of using it as a swing indicator - meaning that it might inform other decisions.
Great blog btw….
Tuesday, April 3 12:11 pm
Bingo Damian….
Tuesday, April 3 10:31 pm
I had another thought for pair trading - have you looked at stocks that are up (using the same criteria) for 8 days? Strike me that you could short those stocks against those that are down for 8 days…just a thought.
Wednesday, April 4 4:06 am
Certainly an interesting idea,but shorting is pretty much across the board a losing strategy. Instead of hedging with a short you would be better off just using a smaller position.
Everytime I mention shorting for swing trades is losing proposition I take the heat but my proposition stands. Give me the rules. I will test it.
Wednesday, April 4 5:54 am
I tend to agree with you - shorting is a tough, tough game especially with private equity out there in addition to so many hedge funds. I was thinking of looking for stocks that have had 8 days in a row with close>open. You could also look for stocks that have 8 days in a row where the close today is higher than the close yesterday, etc.
The situation I was thinking of was if you work for a prop desk and you need to be hedged, then you could do it via pair trade. Or, you could take my other strategy of just hedging the whole book via futures.
Appreciate you taking the time to test - I really need to check out Wealth-lab!
Wednesday, April 4 6:31 am
[...] my post from yesterday on buying a condition where 8 consecutive down days have occurred, you’ll notice some thoughtful comments from Damian. Damian thought that [...]
Wednesday, April 4 2:53 pm
[...] the comments of Dave’s post about a hypothetical system that buys after 8 straight down days, the idea of adding some short positions based on the opposite criteria (8 straight up days) as a [...]
Thursday, April 5 10:54 am
[...] wanted to revisit the trade I mentioned in LLTC on Tuesday morning. I had said that my mean reversion model had highlighted LLTC as a buy candidate [...]
Leave a Comment