What Happens After An “Extraordinary” Big Fall in the S&P 500? (Trading Strategy)

Last Updated on July 14, 2022

What happens after an extraordinary big fall in SPY? Volatility trading strategies can be very profitable – both long and short.

Let’s find out and test by using some simple variables. To measure a big fall we use the average difference between the high and the low over the last 25 days.

  1. Calculate the average H-L range over the last 25 days (in percent).
  2. If the ETF falls more than 2 times this average, enter at the close.
  3. Exit at tomorrow’s open, tomorrow’s close, or after 3 or 5 days.
  4. Test period from 2005 until July 2013.

The best exit is simply to exit tomorrow’s close. That has the best win ratio and is the least erratic. The other exits seem pretty unstable. Here is the equity curve for SPY from close to open:

48 trades and 31 winners make 0.21% on average. That is pretty good if you ask me.

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From this backtest, it seems it might offer a good risk/reward to buy the close of a big fall and hold for one day. This is why we like to work with numbers. Overall, backtesting works.

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  • The high-low is the day’s range. It’s that the value you meant to average or did you mean the average of the True Range (ATR)? Did you analyze this strategy for short trades?

    Reply