Last Updated on June 19, 2022 by Quantified Trading
During my early days as an investor/trader in the early 90’s, I was told (in many books) that an up day that finishes near the low of the range is a bad sign. Is this true? The only way to find out is by backtesting. Backtesting is the core of what we do and we believe backtesting works.
Let’s test a trading strategy:
The Bottom Of The Range Trading Strategy
Here is the strategy:
- (c-l)/(h-l) (the IBS) must be lower than 0.1.
- Today’s close must be higher than yesterday’s.
- If the above conditions are met, then enter on the close.
- Exit on the close after 3 days.
Here is the result:
The test period is from January 2005 until the present. Here is the equity chart:
After Hanna’s study, this setup has occurred 4 times until the present with these trades: 0.17%, 0.9%, 0.7% and 1.52%. Few trades, but very profitable.
However, setting a higher max on the (c-l)/(h-l) criteria gives a bit more erratic picture. With this indicator set at max 0.33 we get this equity chart:
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