3 Day Low Trading Strategy In ETF’s

Last Updated on April 18, 2023

The strategy published in this article has similarities with Larry Connors’ trading strategy called the double 7.

Connors’ strategy is very simple with just two rules. The fewer rules, the better, because less probability of curve fitting. The strategy is based on 7 days low (and high for exit), but in my testing, it seems to work very well on all time frames (in SPY and S&P 500).

It takes advantage of the mean-reverting tendencies in the stock market.

3-day low trading strategy the S&P 500

I decided to test this myself but by changing the entry parameters somewhat to better fit my trading style:

1. The ETF must close on a 3 day low (low is lower than LOW the previous 3 days).

2. The (c-l)/(h-l) must be lower than 0.33 (IBS).

3. Entry is on the close.

The exit is also changed somewhat:

1. Exit is on close which is higher than the HIGH the previous 2 days.

2. OR a time stop of 6 days

3. Exit is on the close.

I changed the rules to have a lesser drawdown. Besides, this strategy does not pay off to hold for a long time. Either it turns around quite quickly, or you risk sitting unnecessarily long and tie up capital.

I also have a shorter time frame on exits to have a lesser drawdown (but also less profits).

3-day low works on many ETFs

Then I did a scan to pick tradeable ETF’s.

I simply use IBS to find the best ETF’s with the best mean-reverting tendencies: go long if IBS is below 0.33 and go short if IBS is above 0.8. Entry is at the close and exit is the next day’s close. A pretty simple strategy!

I ranked the ETF’s and want to trade the 37 best ones going forward. I also included 3 bonds ETFs just to have other instruments than stock ETFs (to end up with 40 ETFs in total).

Is this curve fitting? Of course, an element of curve fitting is in there. But this is the way I have always done it and it seems to work.

This strategy will certainly not work in a lot of ETFs like USO, DBC, and UUP for example. They are not mean-reverting. I also excluded all “ultra” (geared) and short ETFs.

This is the equity curve for the whole strategy:

I have allocated one part of my portfolio for this strategy. It will maximum have 3 positions at any time. That means I have to pick ETFs randomly on days there are many potential fills.

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Explanation of the SPY ETF and its characteristics

The SPY ETF (Symbol: SPY), also known as the SPDR S&P 500 ETF, is an exchange-traded fund that tracks the performance of the S&P 500 Index, a widely recognized benchmark for the U.S. stock market. Launched in 1993, SPY was one of the first ETFs in the market and remains one of the most popular and widely traded ETFs in the world.

One of the key characteristics of SPY is its diversification, as it holds a portfolio of 500 large-cap U.S. stocks across various sectors, including technology, finance, healthcare, and energy. This diversification helps to reduce the overall risk of the portfolio and provides exposure to a wide range of economic sectors.

In terms of performance, SPY has been one of the top-performing ETFs in the market over the long-term, with a history of strong returns. Since its inception, SPY has delivered an average annual return of approximately 9%, which is comparable to the S&P 500 Index. It has also been relatively stable, with low volatility compared to other ETFs and individual stocks.

The popularity of SPY among investors is largely due to its accessibility, low cost, and convenience. SPY can be easily bought and sold on any stock exchange, and its low expense ratio makes it an affordable investment option for both institutional and retail investors. Additionally, SPY is considered a passive investment strategy, meaning that it aims to track the performance of the S&P 500 Index, rather than actively managing the portfolio.

In summary, the SPY ETF is a widely recognized and popular ETF that provides investors with low-cost exposure to the U.S. stock market. With its history of strong returns, diversification, and stability, SPY is a valuable investment option for those looking to build a long-term portfolio.

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