Sunday, February 14, 2010

Five years of trend trading in SPY

Below a table of back-tested trades from my SPY Trend Model

Below a chart of the SPY with the above signals embedded roughly in time

The first notable observation should be an average annual return of 17.85%.   Of the 18 trades, there are 11 wins and 7 losses, for just over 60% winning percentage.  This is consistent, uncannily consistent, with all of my test models across varied time frames and across a diversified set of tradables.  This is and of itself generates a lot of confidence in this kind of approach to trading.

Below a current weekly chart of the SPY Trend Model


Notable on this chart is the answer to my one of the most frequently asked questions about these models.  In the 86 weekly bars shown on this chart, count how many bars touched the trend line and did not trigger a new signal.   By my own count, that would be eight false alarms, 8 touches of the trigger line that went on to close the week without triggering a new position.  We can extrapolate that about 90% of the touches mid-week will trigger switches.  That says to me that I can take on those new positions as the trigger line is broken and not wait until the end of the week, although about 10% of the times I will need to flip back to the original position at the end of the week, commensurate with prices retreating back to the initial position.  

It's hard to figure the negative effect of those whipsaws on total returns, but I am guessing it will reduce overall returns  by about 10%, or instead of an annual return of 17.85%, maybe 16% is more realistic.  Speaking of being more realistic, trading the SSO (Longs) and SDS (Shorts) as surrogates for the SPY, would reduce a hypothetical annual return of 35.7% (2 X 17.85%)  to about 32%.

Drawing some conclusions from the above discussion, trading this Trend Model using a leveraged ETF has shown an average annual return of about 32% over the course of the past 5 years. 

That doesn't mean that this model will continue to make these kinds of returns, nor is it a warranty nor guarantee of any kind or nature. Let's be real here.  I think that this trading technique is about as good as any available to the average in investor or trader.  The five years above covers a lot of different markets, hard up, hard down, sideways and choppy.  Still, in the long term, returns are excellent.  

Like any good trend following system this technique follows the simple concept of letting profits run and cutting losses short.  It does so through a few simple rules for identifying a trend, then entering the trendthen exiting and/or reversing with the trend. Please review the elegance of the trades above in the light of rule-based trading and the following descriptive observation of why we are here:

"Profit-seeking speculation is the driving force of the market."  ---Ludwig von Mises, Human Action: A Treatise on Economics, 1949 (Year of Allan's birth)



JAPO said...

Hi Allan!

Could you comment the vortex indicator status in the first chart shown in this post?

Is that a long term bullish cross or am I seeing it the wrong way?


Anonymous said...

Allan can you post the same results on the daily time frame. Wouldn't the daily timeframe have performed better in the 2005-2007 choppy years by capturing bigger parts of those smaller moves?


MMarino said...

Mr. Harris,

As a token of my appreciation I would really like it if you would take 2 minutes out of your very busy day to watch this short video. I think you'll come to find it rather interesting and certainly 'revealing.'


JD said...

1949? You look no more than 45 Allan.

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Anonymous said...

JD, Allan looks much, much younger than you said. Looks like 45? no way ! My cousins are in their mid 30s and look much older than Allan. Allan looks like 30, maybe 30 + no more. Alan, what keeps you looking so young? I cant believe you are born in 1949 !


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Bernhard said...

:) pfff

JD said...

Lili - you are absolutely right, I take it right back! I had a 2nd glance at myself in the mirror today, and I am nowhere close in looks to Allan...