Introductory Post: Dip Buyer’s Dilemma: Sometimes You Buy the Waterfall
I’ll assume the first two posts have been read and cut straight to the chase.
I’ve added a lower Bollinger Band (50,2) to the system and changed the rules so that the system will not buy $SPY even when the decliners indicator is greater than 80.
The test is going to run from 1.1.2007 to 10.4.2012. The first graph is of baseline system performance where $SPY is bought at the close when the decliners indicator is greater than 80 and sold at the close 10 days later. The baseline performance includes the waterfall trades as identified here. The second graph shows performance after the Bollinger Band filter has been added.
As predicted, the Bollinger Band filter reduces performance. However, it does lower the max trade % drawdown and the max system % drawdown. It also reduces the total number of trades by 25 which lowers exposure significantly.
But does the filter keep the system out of the waterfall trades? Let’s look. In the interest of transparency, I’ve included all the trades made. The list is long. The trades highlighted in yellow were on the original waterfall list and were NOT filtered out.
Below is the original waterfall list:
Using the lower Bollinger Band filter eliminated 7 of the 12 waterfall trades. However, a quick scan of the trade list shows that the system added other waterfall trades. Just scan the % Change column and look for the large losing trades.
While adding the filter did eliminate more than 50% of the waterfall trades, it hurt performance overall (as predicted). To see how much the filter hurt the system, just compare the two equity curves.
With Bollinger Band Filter
Without Bollinger Band Filter
In the next post I’ll apply another popular filter.
To be continued…