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Bankable ETF Strategy: Simpleton Counter-Trend

Jul. 16, 2012 5:57 AM ETDIA, IWM, QQQ, SPY10 Comments
Lawrence Chan profile picture
Lawrence Chan

Broad market indices are mean reversion animals. First, indices like S&P500 do not behave the same way as momentum stocks. Second, the aggregated market-making activities in the underlying components are magnified in the price movement of the indices over shorter time spans. Third, such basic characteristics can be identified quite easily. Here is a skeleton model applied on (SPY) demonstrating how you can profit from this core driver of index price movement.

The Simpleton Counter-Trend Strategy

1. Always in the market

2. AR = average range of SPY over past 6 days

3. AVG = average of SPY close over past 6 days

4. Go long when SPY closes below AVG - 0.2 AR

5. Go short when SPY closes above AVG + 0.2 AR

The Performance

Following is the net points gained by the model since early 1993.

Notable characteristics of the model:

1. It likes volatility. Performance is better whenever volatility increases.

2. During bullish period, short trades suffer and not producing profit.

3. During bearish period, long trades suffer and not producing profit.

4. The net gain, even excluding the 2008 crisis period, outperform the market significantly

5. Just like many other counter-trend strategies, prices can go against the model significantly before reversing its course, making it difficult to utilize leverage unless you are properly capitalized.

6. Most of the time, prices go against the model for days after entry.

7. The parameters of the model over nearby values all produce excellent performance.

Not Designed for All Indices

Is this strategy applicable to other indices? Not all of them.

This model does not work with (DIA). Two factors contribute to this issue; Dow components are linearly weighted based on the price factor alone and that there are only 30 components in the index.

This model does not

This article was written by

Lawrence Chan profile picture
Lawrence Chan is a trader and researcher of financial technologies with over 25 years experience. His work on market breadth analysis, advanced trading techniques of stock market indices, and forex trading has been incorporated into the trading platform NeoTicker. His work is frequently published in a range of prestigious trading journals and on a number of major financial websites. He has mentored hundreds of professional traders throughout his career and is always available to discuss the intricacies of his approach with new and aspiring traders. You can find his eBooks, latest research and market commentaries at: DayTradingBias.com *** Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Please read full disclaimer from my website. ***

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