Larry Connors’ Double Seven Strategy (Does It Still Work?)

Last Updated on June 11, 2021 by Oddmund Groette

Larry Connors and Cesar Alvarez revealed a system called Double Seven in their book Short Term Trading Strategies That Work. This is a fairly simple system that at the time worked very well among a wide range of ETFs. The book was published in 2010, and it would be interesting to look at the performance over the last decade since its publication.

In this article, we look at the performance of the Double Seven strategy over the last twenty-one years in a wide range of liquid ETFs.

What is Larry Connors’ Double Seven?

The strategy has just a few parameters:

  1. The close must be above the 200-day moving average.
  2. The close must be at a seven-day low.
  3. If 1 and 2 are true, then go long at the close.
  4. Sell when the close is at a seven-day high (sell at the close).

This is all there is to it. No stops. A pretty simple strategy that can be tested in two minutes.

The Double Seven is a mean-reversion strategy: It buys on dips and sells on strengths.

This means the strategy should work well on most stocks and stock indices, at least US stocks, but is most likely less efficient on other instruments.

Here is an example of a trade in the S&P 500:

The Double Seven Strategy by Larry Connors and Cesar Alvarez.

The S&P 500 (the ETF SPY) takes a hit, and the system goes long on the close. Nine days later it exists with a significant profit.

We have previously tested many strategies by Larry Connors:

All of Connors’ strategies are 100% quantified, right in the alley of this website. Moreover, Connors only tested on ETFs. The reason for that is simple: An ETF will not go to zero like a stock theoretically can do.

However, a problem is that many ETFs have a high correlation, which is a huge impediment for any serious trader.

The results of Larry Connors’ Double Seven:

We tested on the same ETFs as we did in the previous articles about Connors’ strategies.

We performed the backtests by using Amibroker. For more on why we use Amibroker, you might want to read this article:

The Double Seven strategy has the following “code” in Amibroker:

Buy = C > MA(C,200) AND C < Ref(LLV(L,7),-1) ;
buyPrice = Close;
Sell = Close > Ref(HHV(H,7),-1);
sellPrice = Close;

We tested from the year 2000 or from the inception of the ETFs (the last five ETFs were not included in Connors’ original tests):

Average gain Profit
in % factor
DIA 0.68 1.73
EEM 0.68 1.31
EFA 0.73 1.53
EWH 1.06 1.94
EWJ 0.53 1.28
EWT 1.27 1.87
EWZ 1.18 1.17
FXI 1.09 1.64
GLD 0.78 1.91
ILF 0.93 1.11
IWM 0.84 1.43
IYR 1.22 1.94
QQQ 1.32 2.11
SPY 1 2.41
XHB 0.37 1.05
XLB 0.91 1.66
XLE 0.99 1.55
XLF 0.99 1.66
XLI 0.82 1.68
XLV 1.02 2.48
ETFs not
included:
GDX 1.88 2.13
GDXJ 2.19 1.9
TLT 0.4 1.4
XLP 0.73 2.06
XME 1.96 1.92

How did the Double Seven Strategy perform on the S&P 500?

Let’s look at the ETF with the longest history: the S&P 500 represented by the ETF SPY.

Since its inception in 1993, the Double Seven strategy has triggered 154 trades with an average gain of 1.18% and a win ratio of 82.5%. The high win ratio is offset by bigger losers than winners: 2.99% against 2.06%. However, the profit factor is a solid 2.58 and the Sharpe Ratio is 1.4 (!). Even the maximum drawdown of 33% is much lower than buy and hold’s maximum drawdown of 55%.

The total time spent in the market is about 26% (exposure). Because of low exposure, the CAGR is 6.3% compared to 10.1% for buy and hold (dividends reinvested).

SPY’s equity chart looks like this:

The Double Seven Strategy on the S&P 500. Logarithmic chart.

We made a twist by testing the lowest close of the last seven days (not the lowest low), but it returned slightly less than the original system.

How does the Double Seven strategy perform as a portfolio?

Let’s test the Double Seven strategy on all the above-mentioned ETFs as one portfolio. We allocate 20% of the equity to each position and thus we have a maximum of five positions at any time:

1189 trades with an average gain of 0.63% per trade (excluding slippage and commissions). The equity curve looks like this:

The CAGR is a modest 6.3% but almost all gains happened before 2010. We believe it’s naive to use a “universal” strategy and expect it to work on many financial instruments.

How does the Double Seven strategy perform as a portfolio including just the SPY and the QQQ?

What if we have a “portfolio” consisting of only SPY and QQQ? It turns out it doesn’t work:

There are too many overlapping trades.

Optimizing the Double Seven strategy

We don’t know why Connors and Alvarez used seven days. However, on the S&P 500, the strategy performs reasonably well on any day from 2 until 15 days (and probably more as well).

The Double Seven strategy as a short strategy

What happens if we flip the strategy and trade it short?

As expected it performs badly on the S&P 500:

The Double Seven strategy flipped and traded from the short side.

It’s almost impossible to fight the long-term upward bias in the stock market.

Conclusion:

The Double Seven strategy still seems to perform well on the main stock indices. However, it’s a mean-reversion strategy and in our opinion, there are better strategies for this type of trading.

The good thing is that you can (most likely) make some “twists” to the Double Seven strategy and improve the results.

 

If you like this article, you might like other articles about trading strategies:

Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.