Last week the guys at Quantifiable Edges presented an interesting trading edge which buys one day pullbacks in the S&P 500 during strong up trends.

The exact rules are described as follows:

“After closing at a 50-day high yesterday and higher for at least five days in a row, SPX closes down but above it’s 200-day MA, buy on the close. Sell after X number of days.”

In other words, we are looking for a persistent trending market that finally pulls back and gives us a chance to re-enter the trend. Such a scenario occurred just the other day and looks like it could be another profitable result:

S&P 500 new highs chart

The article shows performance is positive for every holding period from 1 bar up to 10 bars. But the best performance came from a 10 day holding period where the authors recorded a net profit of $58,392, an 84% win rate and a profit factor of 5.52.

I coded this strategy up in Amibroker and got almost identical results. I therefore decided to test this on a range of different ETFs in order to see if the edge holds up over different markets.

Following you can see some results when applying this edge to eight large ETFs with a holding period of 1, 5 and 10 days. Results shown are for the whole data series that I have available from Norgate Premium Data:

1 Day Holding Period

one day pullback strategy amid new highs

5 Day Holding Period

one day pullback strategy amid new highs 5 day results

10 Day Holding Period

one day pullback strategy amid new highs 10 day results

As you can see, our results improved with time in the market. Most of the markets were profitable and SPY was a consistent strong performer.

S&P 100 Stocks

Continuing with a 10-day holding period I found that the edge has been profitable on 62% of S&P 100 stocks over the last 20 years with an average profit of 0.23% per trade.

Reverting to a 5-day holding period I found that the edge has been profitable on 52% of S&P 100 stocks with an average profit of 0.07% per trade.

Amibroker Code

Following is some Amibroker code that you can use to test this system for yourself:

C1 = Ref(C,-1);
ConsecutiveUpDays = BarSince(C1 <= Ref(C1,-1);

Buy = ConsecutiveUpDays > 4 AND C1 > Ref(HHV(C1,50),-1) AND C<C1 AND C>MA(C,200);
Sell = 0;

Applystop(StopTypeNBar,StopModeBars,10);

BuyPrice = C;
SellPrice = C;

Final Thoughts

Although at a glance this looks like a good trading edge there are some issues that we need to be aware of.

First of all, the study cites the S&P 500 index. This is in fact a benchmark and not a tradeable market. This is why I have shown the results for 8 ETFs.

There is also the issue of observing the close and trading on the close (potential future leak) which I have talked about previously.

However, you can see why the authors chose to show the results – the edge shows consistency over holding periods and could be easily adapted for the ES mini or SPY ETF.

Second, although the results are quite good, they improve with time. This suggests an influence from time in the market (the underlying trend) which is unrelated to the edge.

Furthermore, the sample size of 60-70 trades is not very large considering the number of parameters that have been used to define the buy signal.

Lastly, after testing some other markets, it seems that performance is generally best for the issue in question – SPY. This suggests some over fitting may be present.

Overall, this seems like it could be a reasonable edge for further development but there is not yet enough evidence of robustness. Personally, I am not a big fan of strategies like this where performance improves a lot with time in the market due to the influence of the underlying trend direction.

If you are interested in more trading edges, education and fully coded strategies make sure to check out our program at Marwood Research.


Simulations and charts from Amibroker with data from Norgate Premium.

Disclaimer.


 

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6 opinions

  1. I like to read the “Final Thoughts” section, which is always valuable.

    • ignorant

    • January 24, 2018

    • 10:57 am

    • Reply

    Mr Marwood Kindly give a view on endless vertical move of US indices from first day of Jan till today. This rally seems to be without any correction or even a significant pull back. If we consider this with 2017’s continual rally this is now almost one sided market. How do you see it?

    • Trump’s tax cut 35% to 21% is a big deal for corporate profits. Stock markets have rallied to price in the boost that this will give to earnings. We have also seen a lower dollar help boost values in dollar terms. Fundamentally and technically there is not much reason to be bearish. However, the run up on the monthly chart is looking unsustainable. If company earnings and guidance are not top line, and if the dollar takes a turn higher then we might see some consolidation but I don’t see any major down move on the horizon just yet, barring new news.

    • Joerg

    • January 29, 2018

    • 3:05 pm

    • Reply

    JB,
    I love your research and simple, easy trading systems. As I manually trade some the questions arises how to automate them in IB. Would it be possible for you give us IB code ideas? – I see one of Peter Titus systems already includes code to the IB API. Thanks, Joerg

    • That is an interesting idea, will give it some thought and see if there’s any interest. I’m currently searching for an in-box solution that makes the whole autotrading process a lot easier. I have been looking into various products and there are some promising solutions out there so hope to move further in that direction. Thanks for your comment.

        • Joerg

        • January 31, 2018

        • 9:15 am

        • Reply

        Thanks, JB!

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