Dow Jones New All-Time High Trading Strategy (Rules And Backtest)

The Dow Jones Industrial Average is the oldest stock market index in the world. However, it is not as popular as the S&P 500 or the Nasdaq nowadays. But this doesn’t mean it can’t be traded profitably. 

In this article, we are going to show you a signal that has a strong predictive power of the future direction of the index. The average return after one year is 16.86%, which is much better than any random one-year period. 

And at the end, we will also show you the code we use to backtest it.

Without further ado, let’s start.

Dow Jones New All-Time High Trading Strategy – Explanation

Buying at an all-time high may seem odd and contradictory at first, but it can also be quite profitable. It takes advantage of what is called momentum. We have covered momentum in many previous articles:

Momentum involves capitalizing on existing trends. If a stock is going up, it is more probable that it will continue to go up than it is to fall. This has worked for lookback periods of 1-12 months and corresponding holding periods. 

Dow Jones New All-Time High – Trading Rules

Thus, the idea of buying at the Dow Jones at an all-time high makes sense. But our strategy doesn’t buy when it makes every all-time high.

Let’s look at the trading rules of the strategy:

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The idea is to identify turning points in the market to predict the future return of the index.

We believe the trading rules make sense, but does the strategy work?

To determine this we will have to do a backtest:

Dow Jones New All-Time High Trading Strategy – Backtest

As we mentioned before, the signal is triggered only after the filter we used in the trading rules.

Here is the Dow level and buy signal in a chart:

Dow Jones New All-Time High Trading Strategy
Dow Jones New All-Time High Trading Strategy

By doing a manual inspection they seem pretty accurate. The signal was triggered only seven times since 1970.

Here are the average returns without considering reinvested dividends something that would make the returns even higher:

  • 1 month: 0.20%
  • 3 months: 2.56%
  • 6 months: 6.78%
  • 12 months: 16.86%

The index is up 85% of the times a year after the signal is triggered.

If you had bought those seven times and held for one year your total return would have been 222.2%.

Dow Jones New All-Time High Trading Strategy – Conclusion

To sum up, today we showed you a trading signal that has a very strong predictive power about the future of the Dow Jones performance.

Although it only triggers a few times, it is important to have it in mind for when it happens in the future, as it can be quite profitable to trade.

Dow Jones New All-Time High Trading Strategy – Python Code

We have the complete Python code for the strategy:

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get A Trial Access Click Here To Get Access To Trading Rules

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