Saturday, July 18, 2009

Trading the Russell 2000

I keep a notebook (actually several) of all of my trading ideas including results from back testing from all of the various stocks, indexes, etf's, futures, market statistics and yes, even planetary alignments, tides and lunar cycles. While reviewing all of my Blue Wave test results today, I stumbled upon a consistency heretofore completely unnoticed yet intriguing in it's premise and applicability to trading, especially trend trading.

It appears from my testing that one particular trading vehicle consistently generated better results, sometimes much better results, then any other. What I found was that the Russell 2000 index (RUT) did better in my myriad of testing then any other index, including SPX, OEX, QQQQ, SPY and DIA.

Naturally, I Goggled this phenomenon and found a number of similar observations, best summed up here:

The Russell 2000, while not as popular as the S&P 500 or the Nasdaq, is actually much easier to trade. The broadness of the Russell's index causes it to trend better than the Nasdaq and the S&P. The breadth of the 2000-stock-index tends to filter out the noise in the market, which makes it a more efficient market to trade. The brokerage houses tend to tout the S&P and Nasdaq markets because they are best know to the public. The Russell 2000, however, is utilized a great deal by institutional players because it trends so well.

And then this:

However, there is another market also catching the eye of many day traders — E-mini Russell futures. A quick glance at the top trading systems we ranked across seven different statistical measures at the end of 2004 showed something extraordinary — several E-mini Russell trading systems occupying spots at the top of the list.

So let's take a look at the RUT, which coincidentally is the base index for four of the highest leveraged ETF's: TNA, TZA, BGU and BGZ.

Above is our big picture Weekly chart of the Russell 2000 index. A week ago it flipped from LONG to SHORT for the first time since early March.

Noteworthy is the BUY level, at 529.12, just about 10 points above Friday's close. Remember, on this Weekly chart, the index has to close above 529.12 next Friday to flip back to LONG.

Below is the Daily RUT chart:

Note here how the False Bar Stochastic is overbought and now in position for a reversal down. This can be quick, as soon as next week, or it can drag out for several more weeks.

Now let's take a look at the first of our intraday trading charts, the 120-minute, or two-hour chart that is useful for swing or position trading:

The above chart covers the first two weeks of trading in July. Noteworthy here is how well this time frame stayed LONG with a trending RUT over the past week. The Blue Wave Precision CCI basically confirmed two trades, a SHORT followed by a LONG.

The chart above is the 5-minute RUT spanning the last two days of trading. What I see here is an excellent trading system with the only rough period at the subtle change of trend between the end of trading Thursday and early trading on Friday.

Here is a close up of what I am talking about:

Based on the past two days of trading we can see a system that generates a series of winning trades, with only a small time frame between trends that results in choppy trading. Here is a table of all trades taken Thursday and Friday with hypothetical gains, both with the unleveraged RUT and then with one of the Triple-Beta ETF's:

Under the assumption these prices were available and that the Triple Beta ETF's performed intraday as they are structured, two days worth of trading like this hypothetically generated a return of 9.73%. There are usually about 20 trading days in a month, so that there are 10, 2-day periods a month. That generates a hypothetical return of 90.73% a month.

Too good to be true? OK, let's reduce gains by 90% just for the sake of skepticism. Now the return is a measly 9.73% per month. Hardly worth getting up out of bed, eh?

Sometimes I simply stand back and take a broad view of my models, what works and what doesn't. This morning was one of those times, not looking for anything in particular, just browsing over test results, comparing them to my real time trading results, looking for any obvious red flags or other patterns, always seeking better trades, better returns and to some extent, less complexity and less work.

Today's surprise was the RUT, how well it trades with Blue Wave and how much better RUT trends, even on the shortest time frames I trade.



Tom D said...

That's a very good independent observation, Allan. I have two good friends and former trading buddies who day trade and short term trade (days to several weeks) the RUT futures and have done so successfully for years. All the reasons you list I have heard from them too.

Sandy said...

The samples are statistically wanting.

One reference is from Austin Passamonte regarding a "better" trending pattern on the TF as compared to ES, NQ, YM, 6E.

This is doubtful, AP has recently commented (more accurately IMO) that the trending nature of the RUT index which was anecdotally better when it was at the CME was expected to carry over to the ICE as volume was expected to be retained, CME and ICE stats show differently.

TF now is no better than say, NQ or YM or 6E. One real time piece of observation comes from the automated systems that I currently am live with.

One system trades the ES and the other trades a combination of TF and NQ. The ES makes smaller returns (supporting your argument) while the TF/NQ makes bigger returns. However the draw down and risk to reward ratios on the TF/NQ are bigger than the ES.

And the ES leads the other indexes (of that there is little argument).

Yes, the trend seem smoother on the TF (for one, the fills are better because of the point spread - same argument for the YM and the NQ) because large quant systems simply cannot trade the small TF index, a little nod on the ES seems like a massive spike on the TF.....which if caught and identified correctly automatically implies a nice trend profit. The corollary to this is a whipsaw on the ES can lead to an ugly chop on the smaller indexes...(a statement I know to be fairly supportable on my own discretionary trading on the YM on the intraday basis).

If "better" trends are your target you might as well look at the 6E which has much higher volume and has the same pattern as the TF and the same argument holds true.

However, several traders will attest to the wild bucking horse nature of the 6E (a pattern true of the TF as well).

Once again, while a lot of this is flawed because true statistical analysis over a past few years is too short at best and downright flawed at worst.

So while, anecdotal evidence is that, this better "trending" nature is highly suspect. Not until a fair evidence of the drawdown is calculated as well.

While minor, this may be additional insight - I have traded all the above in my discretionary account - and while the trends are indeed more profitable on the TF and 6E the inevitable draw downs are nastier as well.

IMO, no one market is better than the other. Another note is that, frequently S/R levels and Fib levels are violated on the smaller indexes and action is erratic enough to be a cause for concern. One day they trend beautifully and the next day they drop off completely - a trader needs to adjust the anchors everyday.....very few statistical models succeed on that level.

In fact, the argument would be that good discretionary traders would do well on such markets rather than fixed ratio methodologies such as BWT. But then good discretionary traders would do well on the ES as well.

Or perhaps, trade the index that one is best "suited" to.

Allan said...

I appreciate both of the above responses to my original post on the Russell 2000. I think I can sum it up best by repeating my mantra:

Find something that works, then trade it.

In a way my quest here is to merely throw up a smattering of trading ideas to see what sticks to your walls. My own best discoveries have come from some seemingly innocuous observation, either my own or someone else's, that led me down a new path toward some degree of market enlightenment. This blog is my pay back for all those who have inspired me at some point in the past 25 years, to lead me to the success I enjoy today.

There aren't many absolutes in this business, what is a holy grail to one can be a endless hole of losses to another. Persistence and discipline seem to be always lurking as a part favorable outcomes, but success itself is something we make ourselves. Maybe I can plant a few seeds here, but if you haven't figured it out yet, you are going to have to do nurturing and watering if you expect anything to grow.

Speaking of which there is a super moon coming up this week, not a bad time to look it up and see if and when they have messed with the markets in the past. You can start with Arch Crawford, the famous astrological forecaster who is expecting all hell to break loose. He has been an all out BULL for the past three months going into this weekend, where is changing to aggressively SHORT.

What a game, eh?


Mike said...

a little off topic...

but here's a nice list I pulled down from the internet:

some nice "mustangs" in Peter Lynch used to say.

case in point, BCRX, with it's drug approval and 40% price action ....what was it...yesterday?

I like a hybrid approach....these long and short etfs along with some individual picks.

>In a way my quest here is to merely throw up a smattering of trading ideas to see what sticks to your walls. My own best discoveries have come from some seemingly innocuous observation, either my own or someone else's, that led me down a new path toward some degree of market enlightenment.


2 steps forward...1 step back.

But definately forward progression.

This market is for the nimble.

Thanks Allan.


Anonymous said...

Allan, can you tell me how you trade them, my question is that with a 5 mins chart, sell signal can trigger anytime within that 5 mins, and turn back to stay on blue bar at closed, if I wait for the next bar, price can be a lot of different with 3xETF, so wondering what rule do you have on the trading, thanks!! Charlie

Anonymous said...


do you subscribe to Arch Crawford's newsletter ???

if not, can you provide a link to his prediction: He has been an all out BULL for the past three months going into this weekend, where is changing to aggressively SHORT.

thanks ...

Allan said...

Re: Charlie

You're asking for some detailed proprietary settings and strategies which is something I'm not willing to put out there to just anyone.

However, a few general ideas that I have found work especially well:

(1) Require prices to exceed the trigger level by a set amount or percentage, i.e. 5 cents, 10 cents, 15 cents, depending on the underlying instrument;

(2) Use a confirmation indicator, i.e. CCI, 5 period EMA, stochastic;

(3) Use a confirmation time frame, i.e. if you are trading the 5 minute chart, make sure that both 3 minute and 6 minute charts are in sync with 5 minute chart.

There are other ideas, but those three should keep you busy for now. In any case, you should get an idea of how to eliminate or at least decrease the slippage associated with false triggers.


Allan said...

Re: Arch Crawford

Interview Arch Crawford of Crawford Prospectives
July 16, 2009

Crawford's site:

No, I am not a subscriber.

Anonymous said...

Is that a Parabolic SAR that you are using? If so, what are the parameters? Don't you need that day's closing price to come up with the next day's parabolic SAR. In that case, when do you put in the stop/reverse, because if you wait until the open the next day, the stock price may have already went past the SAR price.

Anonymous said...

Wouldn't commissions and spread eat up all your profits? I use fidelity's active trader and pay $8 a trade, plus the spread. I know limit orders help but still. Thanks for your help.

Allan said...

Re: Parabolic SAR

What looks like a parabolic SAR is actually the Blue Wave Trend Model, think of it as a Parabolic SAR with brains. BW allows the current bar's stop/reverse level is known in advance, so you can set your strategy accordingly.

Re: Commissions


Anonymous said...


Why no more weekly charts touting the disaster coming in the market? Don't think that we've forgotten how you pumped the short position and it hasn't materialized.

I wonder how that mafia fella feels after taking up the yingyang.

Ubreako said...

Look at HGSI today...approval for just 1 drug. When NNVC gets it pipeline together.....similar explosive moves expected. Imagine all the buyers and NO shares available. Time will tell.

Anonymous said...

re: Charlie
thank you Allan