SKF: High Probability Setup

I thought about giving this post the title of “Don’t Think; Buy SKF.” My superstitions got the better of me.

The facts are that this setup has appeared 15 times over the life of [[SKF]] . Had it been bought at the next market open following the setup, 12 of the trades would have been winners, for an 80% win rate. The rule has SKF sold the next market open after RSI(2) closes above 80.

Here are the stats from all the trades.

Each trade was 10,000 and a 10% stop was used. Note the average trade, both winning and losing, lasts about 5 days.

SKF is at a critical level here. If this trade fails, and SKF breaks support, it could get very ugly. A stop must be used.

System Quest: Implementing RSI(2) Strategy

I determined some time ago that I would eventually like to make the switch from discretionary trading to mechancial system trading.

Here are some previous posts from my old blog, over a year old, where I work through Tharp’s questions. I have listed his book in the iBC library under my picks. If you are considering system development, or are early on in the process, they might make interesting reads.

Setting My Objectives Part 1: Self Assessment

Part 2: Defining My Objectives

Part 3: Defining My Objectives

Anyway, I’m excited because I’ve found a system that fits my objectives. Of course, this is the strategy that uses RSI(2) to enter and exit long positions in the ultralong and ultrashort ETFs.

BHH over at IBD Index has been doing some great work, and has helped to take this idea from its infancy into a mature system. Dogwood has also made some great contributions. I will be tracking all the trades associated with this system on Covestor, and have put up a widget on the blog so that anyone can see at anytime how the system is working.

I’m putting this information all into one post so that when I receive questions I can refer readers to one place for answers.

What Is the System?

The system creates a long entry into one or more ultralong or ultrashort ETFs when their RSI(2) closes beneath 10. The system triggers an exit from the ETF when RSI(2) closes above 80. The buy or sell is made the morning after the signal is generated. I am currently using only the ETFs which average at least 100K shares traded per day.

There has been a good deal of tesing concerning stop losses, and it seems that the minimum stop should be near 12%, although a looser stop may work well for traders with a higher threshold for pain. If one can stomach the drawdowns, maybe a stop is not necessary at all. That is not a recommendation, just an observation. I have also been testing time stops, and have found that they decrease net profits without a corresponding decrease in the drawdowns.

BHH has also added another condition, and that is that the ETF must be trading above its 50 day moving average. You can check the results of the strategy with that condition applied here: More RSI(2). I think you’ll find the results promising, to say the least. The use of a percentage stop, coupled with this condition, seem to have minimized the drawdowns produced during earlier testing. Right now, I am not using that condition, although I may switch over to using it, soon.

The system typically produces better than 70% winners. This number will change based on any stops or other conditions that are applied.

Possible flaws in the system are introduced by the fact that most of the ETFs have not been trading for even a full 2 years. In order to account for his, I tested the S&P, Dow Jones, and Nasdaq, for at least the past 20 years. The ratio of winners to losers was very similar to the ETFs, but the annual returns and net profits were not nearly as good. Regardless, the system was still profitable but did not beat the indexes. Part of this can be mitigated by the fact that you were only invested about 33% of the time.

The beauty of the system is when it is applied ETFs. The ETFs are leveraged 2x and offer the opportunity to be both long and short. This is why it should beat the indexes.

There is still work to be done on this system. When multiple signals are generated, which ETF should be chosen over another? Also, is the 50 day average the best average to use?

As these questions are answered, and as success is hopefully achieved, I will update this post with future results.

SKF: High Probability Setup

I thought about giving this post the title of “Don’t Think; Buy SKF.” My superstitions got the better of me.

The facts are that this setup has appeared 15 times over the life of [[SKF]] . Had it been bought at the next market open following the setup, 12 of the trades would have been winners, for an 80% win rate. The rule has SKF sold the next market open after RSI(2) closes above 80.

Here are the stats from all the trades.

Each trade was 10,000 and a 10% stop was used. Note the average trade, both winning and losing, lasts about 5 days.

SKF is at a critical level here. If this trade fails, and SKF breaks support, it could get very ugly. A stop must be used.

System Quest: Implementing RSI(2) Strategy

I determined some time ago that I would eventually like to make the switch from discretionary trading to mechancial system trading.

Here are some previous posts from my old blog, over a year old, where I work through Tharp’s questions. I have listed his book in the iBC library under my picks. If you are considering system development, or are early on in the process, they might make interesting reads.

Setting My Objectives Part 1: Self Assessment

Part 2: Defining My Objectives

Part 3: Defining My Objectives

Anyway, I’m excited because I’ve found a system that fits my objectives. Of course, this is the strategy that uses RSI(2) to enter and exit long positions in the ultralong and ultrashort ETFs.

BHH over at IBD Index has been doing some great work, and has helped to take this idea from its infancy into a mature system. Dogwood has also made some great contributions. I will be tracking all the trades associated with this system on Covestor, and have put up a widget on the blog so that anyone can see at anytime how the system is working.

I’m putting this information all into one post so that when I receive questions I can refer readers to one place for answers.

What Is the System?

The system creates a long entry into one or more ultralong or ultrashort ETFs when their RSI(2) closes beneath 10. The system triggers an exit from the ETF when RSI(2) closes above 80. The buy or sell is made the morning after the signal is generated. I am currently using only the ETFs which average at least 100K shares traded per day.

There has been a good deal of tesing concerning stop losses, and it seems that the minimum stop should be near 12%, although a looser stop may work well for traders with a higher threshold for pain. If one can stomach the drawdowns, maybe a stop is not necessary at all. That is not a recommendation, just an observation. I have also been testing time stops, and have found that they decrease net profits without a corresponding decrease in the drawdowns.

BHH has also added another condition, and that is that the ETF must be trading above its 50 day moving average. You can check the results of the strategy with that condition applied here: More RSI(2). I think you’ll find the results promising, to say the least. The use of a percentage stop, coupled with this condition, seem to have minimized the drawdowns produced during earlier testing. Right now, I am not using that condition, although I may switch over to using it, soon.

The system typically produces better than 70% winners. This number will change based on any stops or other conditions that are applied.

Possible flaws in the system are introduced by the fact that most of the ETFs have not been trading for even a full 2 years. In order to account for his, I tested the S&P, Dow Jones, and Nasdaq, for at least the past 20 years. The ratio of winners to losers was very similar to the ETFs, but the annual returns and net profits were not nearly as good. Regardless, the system was still profitable but did not beat the indexes. Part of this can be mitigated by the fact that you were only invested about 33% of the time.

The beauty of the system is when it is applied ETFs. The ETFs are leveraged 2x and offer the opportunity to be both long and short. This is why it should beat the indexes.

There is still work to be done on this system. When multiple signals are generated, which ETF should be chosen over another? Also, is the 50 day average the best average to use?

As these questions are answered, and as success is hopefully achieved, I will update this post with future results.

2014 iBankCoin Investors Conference