Friday, August 15, 2008

Month End Tickler

Ok, here it is. THE HOLY GRAIL. My work is done. I can retire. It doesn't get much better than this. You're only in the market 6 or 8 days a month, so your exposure to low flying Black Swans in minimal. And, you don't need a stop. And, you don't even need a computer. . .a calender will work just fine.
The trade concept is based on carry over momentum at the end of month and was inspired by an article by Thom Hartle in this month's (Sept) ACTIVE TRADER magazine in which he explored tactics to optimize returns of the best performing ETFs at the EOM. Being the tweaker I am, I completely ignored his extensive statistical analysis and simply added a conditional MA support/resistance confirmation for the trigger. . . which improves performance dramatically.
Simple is as simple does for me, and being basically lazy, I just want to play this thing on my beloved IWM and Qs.
Feel free to run it on other ETFs and indices and post the results to the comments.
The system simply buys on the 28th day of the month if the close is above the 15 DSMA and sells 6 days later. . .OR the system sells short on the 26th day of the month if the DSMA is above 13 and then sells 8 days later.
I've highlighted the "above" criterion because this is where the twisted logic of the market comes in. You'd expect that to read "below", reflecting the prospect of selling weakness, but it doesn't work out that way. If you change the signal from > to < you still get 100% success, but leave $1000 on the table. Here's a case where selling strength works best for the Shorts.

Inputs: Len1(15), Len2(6), Len3(13), Len4(8);
If DayofMonth(Date)= 28 and Close > Average(Close,Len1)

Then Buy This Bar at Close;
If BarsSinceEntry = Len2
Then Exitlong This Bar at Close;
If DayofMonth(Date)= 26 and Close > Average(Close,Len3)

Then Sell This Bar at Close;
If BarsSinceEntry = Len4
Then ExitShort This Bar at Close;


MarkHolland said...

Very interesting. Two questions - first, how did you come up with the second idea (selling short)? Second, it seems that is would be possible (but not likely) that you could you have two trades in the same month, one long and one short. If you are short, would you ignore the long signal?

Good stuff, I have enjoyed your recent studies. Thanks for sharing with us!

bzbtrader said...

I wish I could claim brilliance (Thanks, LP) for the short idea, but it was a complete accident. I forgot to change > to < when I cut and pasted the code together. I tested the system and then recognized my "mistake", adjusted > to <, ran it again and realized the "mistake" was actually the better system.
Good question on simultaneous long/shorts. I think the 26th day entry for the shorts would preclude the 28th day long entry from triggering, but I'll look at it more closely when I get a chance.

MarkHolland said...

I did the same thing testing an ATR stop on one of my systems. I took the ATR and multiplied it by 0.8. I was supposed to then subtract it from my entry price. Instead I multiplied it by my entry price. The results were better with the mistake!

Some of the best discoveries come from mistakes . . .

TraderRob said...

Great find. Sometimes the great discoveries are accidental. Maybe indeed the Grail.
I've enjoyed reading your ideas. Keep up the great work.

sysin3 said...

nice !

but i went back 5 years and it was basically flat until 2007.

thinking the short side probably wasn't helpful from 2003 - 2006, which makes sense.

Anonymous said...

2 questions. On the data sheet it says max # of contracts held is 100. So is contracts considered 100shares or 100 option contracts?
Also, if options which strike would you use?
Always enjoy reading your blog...thanks for sharing.

bzbtrader said...

You're correct. 100 contracts = 100 shares. Just an arbitrary trade size to compare performance of various systems I profile.
Regarding which options?. . .that is a huge question and would take several weeks of blog posts to explore. Short answer. . I prefer to be a seller of premium and therefore I sell calls to create a short position or sell puts to create a long position. This approach is risky, to put it mildly, and you need to get level 3 approval from your broker . . and there's no way I would recommend this approach to less than very experienced traders.
If you're talking OTM, ATM or ITM, I almost always go OTM, near term, for the decay, since my trades are so short term.
Hope that helps.
Best approach IMHO is a straddle or strangle for risk management and lots of free sites can give you a leg up on that tactic.