GDX Trading Strategy – The Greatest Gold Stock System You Should Trade
Last Updated on June 30, 2022
Jay Kaeppel wrote an interesting post about gold stocks: The greatest gold stock system you’ll probably never use. I have a twist to this system which I’ve been trading for some weeks. Since Kaeppel has published it I might as well publish it myself. And it’s so simple and the results are so astonishing I have a hard time believing this will continue. Anyway, here it is:
- If GDX (Gold stocks (Gold Miners)) rises from the open to the close more than 0.1%, buy on the close and exit on the opening the next day.
- If GDX (Gold stocks (Gold Miners)) rises from the open to the close more than 0.1% the day before, sell short on the opening and exit on the close (you have to both sell your position from number 1 but also short some more).
The test period is from inception in May 2006 until the present. The above criteria are all there is to it. The reason I have set a minimum rise of 0.1% is that you need to send orders at least 15 mins before the close. The strategy works well for any movement bigger than -0.1%. So this gives you some leeway.
This is the result of part 1 of the trading strategy:
| P/L in % | #trades | #wins | Avg |
| 273.2 | 716 | 448 | 0.38 |
This is the result of part 2 of the strategy:
| P/L in % | #trades | #wins | Avg |
| 185.9 | 707 | 406 | 0.26 |
Here is the equity curve for both these parts combined:
No slippage and commission are included. My experience tells me they should not be detrimental to the trading strategy when the average is so high per trade.
This is an incredibly simple gold stock trading system, and just as incredibly easy to trade. You can just send market orders on the close and on the opening. No fancy stuff. Still, I think most would not trade this system. Many will say “nice system, but need to be tweaked a bit”. Others will simply say it’s too good to be true.
However, over the last 3-4 months, it’s not been as profitable as previously. Is this the beginning of the end of this system? Have too many traders caught the interest and it gets erased by all seeing the same patterns? Is it just randomness for 6 years that made this equity curve? Why have gold stocks risen from close to open, but fallen from the open the next day? This is what makes trading interesting!
If we flip the strategy the results are a lot worse and certainly not a tradeable trading strategy.
Update in January 2021: As more or less expected, the system has not performed after publishing the article. Actually, it has performed very badly and incurred huge losses. Most likely, the strategy was just noise and randomness.
Surprisingly this strategy also works with C/BAC (but not as much anymore).
How come you have 9 more trades in part 1 compared to part 2?
A very good question and I thought I had done something wrong. Well, actually I did 🙂 It turned out I had forgotten to include the trades where the open was exactly the same as close in part 2. Luckily, no huge impact on the results.
Isnt this curvefitting the long overnight/short day by zerohedge?
I don’t read zerohedge, so I have no clue. Whether it’s curvefitting, I don’t know, up to yourself to decide! I’m trading it myself, and so far with pretty good results. Just one of many things I trade.
I wonder why it works so much better on GDX than GLD?
Yes, I don’t know. But there is a huge difference between the price of gold and gold stocks. Stocks could have different costs, bad management etc. that is not an issue for GLD. The whole “system” with GDX could just be a random character for some years, before it vanishes. But it’s been there for 6 years, which is quite a long time. I’m trading this as long as it seems to work. I’ve had other patterns that worked for years and I still had problems beliving in it.
It knocks it out of the park when you test it using Yahoo data. Wonder if the Yahoo “Open” price is attainable. Sometimes it’s the first reported 9:30 print on any exchange rather than the ARCA opening cross.
It’s not that much of a difference. But this is still theory, one needs to trade it leave first. I have traded it for some weeks, and the results does not differ very much.
Short GDX comes with a 100%/year borrow charge @ IB. But I’m assuming you don’t pay if you’re flat or long by the close.
Returns seem to have dropped off during the last 6 months or so, especially on the short side: http://i.imgur.com/QQQIv.png
Temporary blip or the end of the road?
I must also say I find it uneasy to trade something without a behavioral or structural or inefficiency theoretical explanation behind it…and I can’t think of one for this effect! Will definitely keep an eye on the returns to the strat in the future though.
Yes, you’re right, it’s hard to find reasons why it works (worked). I’m still trading it, one of 25 strategies.
I have recently started trading this, although I am using a small basket of gold stocks and ETFs. Here’s an article that attempts to shed some light on whats going on with gold intraday versus overnight. https://marketforceanalysis.com/articles/latest_article_081310.html.
Hi, thanks for your article. I’m gonna have a look at it!
XME gives similar result
This strategy performed well for quite some time after you posted it here, but the last 3 weeks has seen the worst loss in 10 years. How do you determine when a strategy is no longer working and its time to stop trading it?
Yes, you’re right. I’m still trading it, but only losses over the last weeks. Is the strategy gone forever? We were fooled by randomness? I have no idea. But I’ll give it some more trades before I throw it away.
what is the basis this strategy works? isn’t too good to be true
Perhaps, not working very well lately.