Analyzing Trading Systems

trading systems

trading systemsWe went into the week with the possibility of a few of these systems generating sell signals. That sure wasn’t how we ended the week.¬†After a couple of tense moments early in the week, the market survived a lot of the reports it was worried about and shot higher on Thursday and Friday.

After only three weeks, four of the systems are tied with a return of 1.67%. System 4 is in sole possession of fifth place with a return of 1.05%, and System 5 remains in last place as it has yet to place a trade.

System 1 – Buy & Hold (+1.67%)

trading systemsBuy and hold investors were thrilled to watch the general market continue higher this week. After three weeks, anyone who would have simply bought and held the SPY during this comparison would be up 1.57%. While this return is great, we need to keep in mind that this approach has no downside protection whatsoever when the market eventually corrects. While the timing and magnitude of that correction are unknown, it is inevitable. The markets simply can’t continue going up forever.

System 2 – IBD Market Calls (+1.67%)

trading systemsIBD style investors would have been scared early in the week as distribution days have been piling up lately. However, the positive action that took place on Thursday and Friday went a long way towards alleviating some of those concerns. That positive action does not mean that IBD is going to ignore the number of distribution days if more should occur. Because of that, we will want to keep a close watch on their Big Picture column in the coming week.

For now, System 2 is up 1.67% in just three weeks and has been as successful as any of the other approaches. I believe that having a condition that causes the system to go to cash will give it a superior advantage over System 1. This is likely to show up as soon as the current uptrend begins to encounter some signs of trouble.

System 3 – 10/100 Moving Average Crossover System (+1.67%)

trading systemsAfter finishing last week right at the 10 day line, System 3 started this week in jeopardy of losing that 10 day line. That might have put it on course for an eventual sell signal if the 10 day line turned down towards the 100 day line. As it turns out, the exact opposite happened and the price bounced off the 10 day line and shot higher on Thursday and Friday. This reaffirms the strength of the current uptrend as well as the position currently being held by System 3.

In the past three weeks, System 3 has logged a gain of 1.67%, which puts it among the leaders when comparing these six different approaches. Like System 2, I believe System 3 will have an advantage over System 1 when an eventual correction happens. It will be very interesting to see how both System 2 and System 3 handle that correction and which system performs better.

System 4 – 89/13 Breakout System (+1.05%)

trading systemsSystem 4 saw the same positives that each of the previous systems saw this week. The only reason it has a slightly lower overall return is that it was the last system to generate a buy signal and get into this uptrend.

The system is currently holding a long position, so it would take a new 13 day low to generate a sell signal. After finishing last week floating around its 13 day line, the price jumped back into new 13 day highs at the end of this week. This means it is highly unlikely to generate a sell signal in the coming week unless the market completely collapses.

System 5 – 3 Day High/Low Mean Reversion System (+0%)

trading systemsAs we would expect on such a positive week, System 5 did not produce any new signals. It closed right at the 5 day line on Monday, Tuesday, and Wednesday. This was close to generating a buy signal, but only Monday and Tuesday were down days. Wednesday was a positive close just slightly above the 5 day line.

This system is not expected to make a large number of trades, and the trades it does signal will mostly be short term trades that only last for a few days. For now, this system is happy to sit in cash, despite the fact that it is falling behind all of the other systems.

System 6 – 200 Day SMA System (+1.67%)

trading systemSystem 6 was right up there with System 1 and System 2 this week in terms of their lack of trading excitement. The SPY is almost 20 points above its 200 day line, so there is not likely to be any trades generated from this system for quite a while.

The system is currently showing a return of 1.67% for the length of this comparison. This puts it right up there with the first three systems. Like System 2 and System 3, System 6 has a component that will cause it to go to cash when the market turns south. When that eventually does happen, each system will likely trigger that response at a different point. That is when we can expect this comparison to get very interesting.