Poor Man's Program Trading After 3 Months

Includes: DIA
by: Jamin Chen

On September 7, I presented a trading strategy in which a fixed number of shares of DIA is bought when its price falls a fixed amount and the same amount of shares is 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.

Three months have passed since I personally started doing it on August 3. On October 7, I reported the result after two months of actual trading and here is the result after three months (November 3):

  • Maximum cash put aside for this strategy: $248,400.00
  • Number of shares of DIA I own now: 200
  • Net from trading, after commissions: $6,607.38 (from 8/3/2011 to 11/3/2011)
  • Return on the cash reserve: 2.66%
  • Return on the cash reserve, annualized: 11.0% (from 8/3/2011 to 11/3/2011)
  • Cash on hand: $232,289.48
  • Breakeven price for the DIA on hand: $80.55

The following is a chart of the history of the annualized return since this trading started:

(Click to enlarge)

The 6-period moving average in the chart is here only to help visualize the general direction of the progression. I cannot tell how long this trend will continue though it has been very good so far. An annual return of 10-12% is nothing to be sneezed at it.

In this trading strategy, I chose to trade when DIA was $118 and below. This choice was made based on my visual inspection of the performance of DIA during the last 12 months. In there, I divided the investment in the following five parts:

  • Part 1: DJIA above 14,000
  • Part 2: DJIA between 11,600 and 14,000
  • Part 3 DJIA between 10,600 and 11,600
  • Part 4: DJIA between 7,000 and 10,600
  • Part 5: DJIA below 7,000

This division of investment is rather rigid and I do not mean to stay this way forever but I think it is good for the next several months. The equity market is now in the Part 2 territory. I now have only 200 shares of DIA on hand to deal with it. Apparently, I have not accumulated enough of them when the market was in Part 3. However, Part 2 is the part I will try to sell off my inventory of DIA and stay in cash as much as possible. Until a clear new pattern develops, I will try not to accumulate DIA when the market is in Part 2 because if the market does return to Part 3 which represents the current average of the market, I would have to carry the DIA bought especially at the high end of Part 2 as paper loss. My concern here is this: if you bought at the top of Part 3 at $116 for a share of DIA and sold it at the bottom of Part 3 at $106, you would incur $10 loss per share or 8.6% loss on the original investment. If you had bought DIA at $127 out of greed at the top of QE2 and sold it out of fear at $104 at the recent market low, the loss would be $23 per share or 18.1% on the original investment.

Disclosure: I am long DIA.