3 Day Low in ETF’s
| November 1, 2013 | Posted by Oddmund Grotte under strategies |
Larry Connors have written a strategy called the double 7. This is a very simple strategy with just two rules. The less rules, the better, because less probability of curve fitting. This 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.
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.
Exit is also changed domewhat:
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 lesser drawdown. Besides, this strategy does not pay off to hold for a long time. Either it turns around quite quick, or you risk sitting unnecessary long and tie up capital. I also have a shorter time frame on exits to have lesser drawdown (but also lesser profits).
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 on close and exit next days close. Very simple. I ranked the ETF’s and want to trade the 37 best ones going forward. I also included 3 bond ETFs just to have other instruments than stock ETFs to end up with 40. 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 ETF’s like USO, DBC and UUP for example. They are not mean reverting. I also excluded all “ultra” (geared) and short ETF’s.
This is the equity curve for the whole strategy:
I have allocated one part of my portfolio for this trategy. It will maximum have 3 positions at any time. that means I have to pick ETFs randomly on days there are many potential fills.
So, the equity curve is purely from the strategy using IBS, without the lowest low rule?
Oh no, This is the strategy explained in the article. I might have formulted myself badly. I’ll make some changes.
To clarify, the strategy only uses the 2 entry rules and 2 exit rules you specify at the beginning of the post?
Is the equity curve for the long strategy only, or for both long and short?
Could you post results in table form as well?
Sorry for the all the requests. Thanks!
Yes, the four rules explained. This is for long only. For short it’s much harder. Short makes money, but a lot more erratic.
Could you post those 37 best ETFs you found? Do you there is something inherent about these ETFs that make them the best (past and future), or is it something you would tune in real time (e.g., periodically pick the best x ETFs over the past x months and set that as your universe)? If the latter, wonder what the test results would be walk-forward?
My walk forward test is my live trading
Testing usually is just an indication. When i trade with live money I discover a lot more about the strategy (and myself). I don’t want to spend too much time testing before I have dipped my toe in the water. Trading is very difficult my experience tells me testing is very hard to duplicate in the “real world”.
I hear you. Thanks. Are most of the ETFs you found to behave well country-specific ETFs, or US index ETFs?
Can you share with us the 40 ETF’s you’re tracking?
Hei Oddmund,
Tilfeldig oppdaget jeg din hjemmeside og syntes at det er mye interest. stoff. Har kjøpt begge bøker fra deg på HO – bokklubb.
Jeg lurer på har du produsert dagens rapport angående aksjer i Norge?
Hilsen
Kim
Rapport?
Hello.
I have one question.
Do you buy on the opening of the market?
On SPY, yes, but not on all. If it’s not very liquid, I often get a bad price. This is the practical problems vs. backtesting.
Happy New Year Oddmund!
Thanks, and the same to you!
I believe the double 7′s buys on the close. You are choosing to buy on the open the following day after your 2 criteria are met?
Thanks,’
John
Hi,
Good point. I have not stated it clearly that I enter amd exit on the close. I have changed my article to include that.
Interessting strategy
Do you use any kind of stop loss? A trade goes max 6 days – I don’t want to be in the market for a week without a Stop Loss…. What do you think or what are you doing for this topic?