Short strategies can add tremendous value to a portfolio of trading strategies, something we have covered in multiple articles (see below). A bear market is mostly good for short term traders, see our post about bear market strategy, but profitable short strategies can add fuel to your returns. Overall, profitable and robust short strategies are rare.
- What does correlation mean in trading?
- Uncorrelated assets and strategies – benefits and advantages
- Does your trading strategy complement your portfolio of strategies?
- Why build a portfolio of quantified strategies
A few months back we presented a short strategy bundle with 3 short strategies in SPY, XLP, and SMH. How have these short strategies performed in 2022? Let’s backtest and find out.
Short strategies in 2022
Please keep in mind that practically all asset classes have performed poorly in 2022, however, trend-following strategies have performed very well.
We make the following assumption in our backtest: we allocate 33% of our total equity for each short trade. You might use another allocation, of course.
This is what the equity curve looks like:
There are 35 trades and the average gain per trade is 0.65% (24 winners). There is one very bad trade in August that creates most of the drawdowns. The annual return is a solid 8.8% (CAGR – what is it?).
At first glance, the equity might seem a little erratic, but that is due to a short time frame. Below is a 12-year equity curve:
Short strategies since 2010
How have the 3 short strategies performed since 2010 – a market with falling interest rates and rising equity prices? This is the equity curve:
There are 232 trades and the average gain is 0.45% per trade. CAGR is 2.5%.
Our strategy bundles can be found on this page (or in our shop):
