In the long run, one can expect to be rewarded for taking risks. Let’s test a very simple strategy with this in mind. Let’s buy every open down.
Every Open Down Trading Strategy
If SPY (which is an ETF of S&P 500) opens down, but above -0.45, then go long at the market, vice versa for short. We don’t want to buy lower if it opens lower than -0.5%.
The reason is simply the downward pressure has just increased when that happened the last two years. The exit is at the close. The test period is from 1. January 2010 until 29th of June 2012. We get the following accumulated chart in total percent, excluding commissions and slippage with a 0.2% target:
The average is .11% for longs and .05% for short. Obviously, we get different results for where we set the target, but the best seems to be a target of .25%.
Let’s put in another criterion: for long the day before has to be a down day, vice versa for short. Then we get the following curve:
Average for long increases to 0.14% and for shorts to 0.053%. We can conclude that for longs this seems to be a tradeable strategy.
Why should this work? There is an element of mean reversion in SPY. Also, the target should take us out with a reasonable profit to make this worthwhile.
Sometimes there are “bad prints” in the quotes. Therefore, the results might not be accurate. The high of the day might be higher due to erroneous prints/trades. One can expect this strategy to be worse than tested. It’s always like this. This has to be traded in real life for proper testing. One can trade the smallest position, 100 shares, to test this.
Another good thing about this strategy is that there should be no slippage unless our positions move the market. If trading between 1000 to 5000 SPY that is probably not the case. We trade at the open and at the close.
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– How does the “Every Open Down” strategy work for long positions?
For long positions, if SPY opens down but above a certain threshold (e.g., -0.45), traders go long at the market. The strategy avoids buying if SPY opens lower than -0.5%.
– What is the criterion for short positions in the strategy?
The strategy’s criterion for short positions is essentially the reverse of long positions. If SPY opens down but above -0.45, traders go short at the market. Conversely, they avoid shorting if SPY opens below -0.5%.
– What is the exit strategy for the “Every Open Down” strategy?
The exit point for this strategy is at the close. Trades are closed at the end of the trading day.