Poor Man's Program Trading After Two Months

| About: SPDR Dow (DIA)

On September 7, I presented a trading strategy in which a fixed number of shares of DIA are bought when its price falls a fixed amount and the same shares are sold when its price rises the same amount. For example, you buy 100 shares of DIA on every drop of $2 in its price and sell 100 shares of DIA on every $2 rise. I call this a poor man’s program trading.

I personally started doing it on August 3 when the price of DIA dropped below $108. In other words, I bought 100 shares of DIA at $108 and on every $2 drop thereafter. And I sold 100 shares of DIA whenever its price rose $2 from my last DIA buy. I set aside enough cash to last until DJIA drops to 6,600 or DIA=$66. I chose a DJIA of 6,600 because it is slightly below the bottom reached after the subprime market crash.

Under this trading strategy, I made my first DIA purchase at $118 on August 3. Two months had passed and how did I fare? Not bad. The following is where I am now (October 4).

Maximum cash put aside for this strategy: $248,400

Number of shares of DIA I own now: 710 (See below)

Net from trading, after commissions: $4,567.90

Return on the cash reserve: 1.84%

Return on the cash reserve, annualized: 11%

Cash on hand: $172,762.71

Since I started this, I made three modifications.

  1. As I accumulated sufficient amount of net gain, I increased the lot side from 100 to 110 shares. As more net gain is accumulated, I intend to keep raising the lot size in order to get some “compound interest” effect.
  2. I have bought an extra lot at $109 for future sell above $120. I will continue to make some extra buys in the coming days for sell when the DJIA returns to over 12,000.
  3. I have increased the interval from $2 to $4 when DJIA is below 10,800 to conserve my cash as well as to boost the return on investment. I expect the market to be more volatile as it descends from there.

Based on modification No. 3, my new maximum cash reserve is $157,050. This has greatly boosted the return on the cash reserve to 2.91% and when it is annualized, 18%. The cash on hand has been reduced to $81,412.71.

Disclosure: I am long DIA.