Last Updated on June 19, 2022
Thursday last week, the 4th of November 2021, was the fourth day in a row with a higher close than the previous close in the S&P 500. How often does this happen?
Let’s test on the ETF SPY since its inception in 1993: It has happened 100 times, so it’s not rare. Is this a tradeable trading edge?
Trading idea number 1:
- Today is Thursday.
- The close is higher than the previous close for the fourth time in a row (all days of the week are thus positive).
- If 1 and 2 are true, let’s but the close and sell Friday’s open.
This is the equity curve:
If we optimize the trading strategy to include any day of the week we get the following results from the close that particular day and exit the next day’s open:
- Mondays: -0.07%
- Tuesdays: -0.02%
- Wednesdays: -0.03%
- Thursdays: 0.12%
- Fridays: -0.08%
Mean reversion seems to be in play except for Thursdays.
If we exit at the close instead of the open, the strategy performs worse.
Trading idea number 2:
Let’s test a second idea:
- Today is the fourth day in a row where the close is higher than the previous close.
- If bullet point 1 is true, we buy the close.
- We exit on the close at a trading day when the close is lower than the open.
Again, entering on a Thursday gives the best result, but a tiny 0.02% gain. The poor result was expected because we sell on weakness. The average gain per trade is this:
- Mondays: -0.09%
- Tuesdays: -0.09%
- Wednesdays: -0.19%
- Thursdays: 0.02%
- Fridays: -0.25%
This is the equity curve for Fridays:
Both of these setups can probably be improved. Anyway, the main idea with backtesting is to test trading ideas and see if they work. We like to save our better ideas for your paying subscribers: