The world of stock trading is a dynamic and ever-evolving landscape, where traders employ a wide array of strategies to capitalize on market movements. However, sometimes very basic strategies can perform really well. The 5 consecutive higher open trading strategy is based on the idea that if the market has been going up, it will continue to do so in the near term. But does such a simple strategy perform well?
The 5 consecutive higher open trading strategy performs well: the average gain is positive on all time frames.
In this article, we are going to look at what the 5 consecutive higher opens trading strategy is, explain the trading rules, and backtest the strategy on the S&P 500.
What is the 5 Consecutive Higher Opens Trading Strategy?
The 5 Consecutive Higher Opens trading strategy is a technical analysis approach that is based on the premise that consecutive higher opening prices can signal the potential for an uptrend or bullish momentum in the market. Traders who use this strategy aim to enter positions on the expectation that the upward momentum will continue, providing opportunities for profitable trades.
The strategy relies on the psychology of market participants, the concept of trend continuation, and the possibility of creating a self-fulfilling prophecy. However, like all trading strategies, it carries risks, and traders should use it alongside risk management techniques and other confirmation signals. But how does the signal work on its own?
5 Consecutive Higher Opens Trading Strategy – trading rules
The trading rules of the strategy are simple:
When the S&P 500 opens higher than yesterday’s close 5 consecutive times in a row and its open price is above the 10-day moving average, we buy the open and hold it for 5 days (one week).
Otherwise, we stay in cash.
5 Consecutive Higher Opens Trading Strategy – backtest
We backtested the strategy using the ETF version of the S&P 500, SPY. The data is not adjusted for dividends and it starts in 1993. Here is the equity curve:
The system has traded 163 times since 1993. Here are some metrics and performance statistics about the strategy:
- CAGR was 1.32%
- Time spent in the market was 10.09%
- Risk-adjusted return was 13.08%(CAGR divided by time spent in the market)
- % of winning trades were 57.96%
- The average win was 1.32% and the average loss was -1.17%
- Max drawdown was -10.27%
As you can see, the CAGR is very low, but so is the time spent in the market. The percentage of winning trades is okay but could be much better, and the average loss is just slightly less than the average gain. A very positive aspect of the strategy is that it has a very low drawdown. Overall, the strategy is profitable but could be further improved.
We also looked at other holding periods:
5 Consecutive Higher Opens Trading Strategy – Conclusion
To sum up, today you learned what the 5 consecutive higher opens trading strategy is. We backtested the strategy and found that it has performed relatively well since 1993. However, it’s essential to combine this strategy with proper risk management and perhaps add other variables. As with any trading strategy, there are no guarantees of success, and it’s important to practice discipline and continuous learning.