A New Experiment

trading systems

trading systemsIf you’ve noticed the severe drop-off in the amount of posts here so far this year, there is actually a reason. I have been spending a vast amount of time reading and studying different trading systems and approaches. Everything about system trading has become fascinating to me and I want to explore it all.

Of course, this emphasis on studying systems and their backtesting results has certainly come at a cost. I have completely missed out on all the fun everyone seems to be having in the market so far this year.

I’m at the point now where I would like to begin to test out some of these systems that I have been studying. For that reason, I am going to learn to use backtesting software. However, while I am struggling through that learning curve, I thought it would be interesting to trade a few very simple systems in a mock portfolio just to see what happens.

I have set up five portfolios at my Google Finance account (If anyone knows a better place to run multiple mock portfolios, I’m all ears.). I am going for simplicity here, so I am only going to trade SPY. I will use five different systems to trade the ETF and see what happens. Obviously, the rules and such will evolve as we go, but there’s no time like the present to get started.

Each portfolio is starting with $10,000 and will use closing price data starting with Monday, July 15, 2013.

With that said, here are the five trading systems:

System One – Buy & Hold

trading systemsThis is the simplest system possible, a simple buy and hold strategy. Obviously, there isn’t much to discuss here. It might not be much of a “system,” but it is surely the top strategy that the other systems are competing against.

System One purchased 59 shares of SPY on Monday, July 15 at 168.15.

System Two – IBD Market Calls

Longtime readers of this site know that I am a big fan of the IBD approach to investing. I have often wondered how a simple system that invested in the indexes based on their market calls would do. Here is my chance to find out.

This system will hold long positions in the SPY when the market is in a Confirmed Uptrend. It will close its position when IBD goes to Market in Correction. I am intentionally ignoring Uptrend Under Pressure situations to keep the system simple. I do expect to note and comment on how using “Uptrend Under Pressure” as an exit signal would affect results.

Since we are currently in a Confirmed Uptrend, System Two established a long position on Monday, July 15, at 168.15.

System Three – 10/100 SMA System

trading systemsThe 10/100 SMA System is a simple moving average crossover system. The system will hold long positions when the 10 day SMA is above the 100 day SMA. It will hold short positions when the 10 day SMA is below the 100 day SMA.

Obviously, there are a number of aspects I could add to this system to improve its returns. I could add a long term trend filter or an ATR multiple stop-loss. I am intentionally avoiding those for this experiment in order to keep the systems as simple as possible. The goal here is simply to display basic trading systems that can provide a starting point for interested traders.

Because the 10 day SMA is currently above the 100 day SMA, System 3 established a long position on Monday, July 15 at 168.15.

System Four – 89/13 Day Breakout System

trading systemsThe 89/13 Day Breakout System was documented in one of the appendices of Michael Covel’s Trend Following. The system establishes a position after an 89 day price breakout and then exits that position on a 13 price breakdown. The breakout can be in either direction and the system will place the trade accordingly.

Ironically, our timing appears to be perfect here. SPY closed at 168.15 today, which is just .03 shy of its current 89 day high. This means that there is a good chance that we see a breakout any day now. For now, this portfolio remains in cash.

System Five – 3 Day High/Low Mean Reversion System

trading systemsThis was the first system featured in High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading by Larry Connors and Cesar Alvarez. I am very excited to see how a mean reversion system correlates to the trend following systems in actual practice.

This system establishes a long position when the price is above the 200 day SMA, but drops below the 5 day SMA and records three consecutive lower lows and lower highs. It establishes a short position when the price is below the 200 day SMA, but rises above the 5 day SMA and records three consecutive higher lows and higher highs. It exits a position when price crosses the 5 day SMA.

What is going to be interesting is that this system is everything that trend following is not. It looks to take quick profits out of an overextended market, while leaving itself exposed to incredibly risky downsides.

Since the SPY is currently above its 5 and 200 day SMA lines, System Five will remain in cash for now.