Sunday, April 26, 2009

Simple System

I stumbled across a very simple system today. It buys when SPY closes in the bottom 20% of the days range. It buys the close (day 1) and sells the open on day 3. It's essentially a one day trade but it sells on day 3's open opposed to day 2's close.

It is commonly known that the sell strength, buy weakness, mean reverting strategies are working right now. It didn't used to be like this though and at some point in the future it probably won't be either but until then that is where your focus should be. A good example of this is, go read some of the older trading books by Williams, Connors, the Turtles, etc. Many of their strategies were based on buying breakouts (buying strength). If you test those systems in today's market (I have) you will not achieve the same satisfactory results.

I don't recommend using this alone as a trading system but the concepts presented should be considered when building your own.
Results on SPY (5 yrs) - click to enlarge:

Here is a screenshot of what happens when 20% is replaced with x% (column A)

The results are surprisingly decent even when tested over a 20 year period. This certainly does not work with all stocks, so backtest accordingly.

TradeStation code:
INPUTS: len(1), pcent(.2);
IF Close < (Low + Range*pcent) THEN buy this bar at close; If BarsSinceEntry=len THEN sell next bar at open;

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