Getting Punched In The Face

system trading

system tradingThe general market got punched in the face this week, and so did just about every one of our systems. We would be incredibly foolish to believe that any system is immune to taking a hit when the markets suffer, but we also want to strive to make sure that our systems can handle times like this without exposing our capital to excessive risk.

At times like this, when we may or may not be seeing a change in trend, it is interesting to see which of our systems are getting out quickly and protecting our capital and which ones are leaving us exposed. However, there is a point where some of these systems may prove to be over-protective. That could be just as prohibitive to earning profits.

Just like a great boxer, we want our systems to be able to take a punch in the face without collapsing, but at the same time know when to protect themselves. As the markets continue to move, this experiment will continue to get more and more interesting.

System 1 – Buy & Hold

Overall Return: -1.38%

system tradingThe SPY took a hard hit this week. There is no way to really know whether this is a short term consolidation or a long term correction, but we do know for sure that System 1 is planning to stick it out regardless. This is the inevitable downside of a long only strategy. System 1 is completely depended on the market continuing to go up and has no defense mechanism to protect against a correction of any magnitude.

The system went from slightly positive last weekend to down a little over one percent this weekend. However, the devil’s advocate argument is that I started this strategy at possibly the worst possible time. Had I started this at the beginning of the year, the overall results would still look impressive.

System 2 – IBD Market Calls  

Overall Return: A: -0.69%, B: +0.61%, C: -0.88%, D: +0.29%

trading systemsSystem 2 got a bit more complicated this week as I added C and D versions. Here’s a quick review:

  • System 2A – Long on Confirmed Uptrend, Cash on Market In Correction
  • System 2B – Long on Confirmed Uptrend, Cash on Uptrend Under Pressure
  • System 2C – Long on Confirmed Uptrend, Short on Market In Correction
  • System 2D – Long on Confirmed Uptrend, Cash on Uptrend Under Pressure, Short on Market In Correction

After the big down day on Thursday, IBD changed their outlook to Market in Correction. This gave us a signal in each of the four versions of System 2. As you can see, versions B and D were able to preserve more of their profits than A and C were because they got out quicker. However, this could have backfired if the market would have rebounded this week.

Moving forward, versions A and B are sitting in cash while C and D are short the SPY. The next signal for each of these systems will be a Follow-Through Day, which will change IBD’s outlook back to Confirmed Uptrend. At that point, all four versions will establish long positions. It will be interesting to see if versions C and D are able to profit from the correction, and if they can keep those profits before the eventual Follow-Through Day.

System 3 – 10/100 Moving Average Crossover System

Overall Return: -1.36%

trading systemsAfter losing the 10 day line last week, the SPY ended this week trading closer to the 100 day line than the 10 day line. This downturn dumped System 3 into negative territory for the first time. We can see on the chart that the 10 day line has turned down towards the 100 day line. It looks like we are headed for a negative cross that would signal a trade in this system, however that can all change in a hurry.

In the coming week, System 3 will be watching the 10 day line to see if it crosses the 100 day line. Since that is the only signal for this system, that is the only thing we need to look out for when trading System 3. This system gives the market plenty of room in situations like this when a change in trend may or may not be happening. This can be a blessing or a curse depending on what happens long term, but if we stick to the system, we can expect to be profitable in the long run.

System 4 – 89/13 Day Breakout System

Overall Return: -1.97%

system tradingSystem 4 began the week holding a long position that it would exit on a close beneath the 13 day low. That break happened on Thursday when the SPY spent the entire day trading below its 13 day low. This meant that System 4 would exit the position at Friday’s closing price, which was 165.83. While the system did give back all of the profit it had made on this position, it did manage to exit safely before taking a significant loss.

Since the system is back in a cash position, it will now look for a breakout above the 89 day high or below the 89 day low. The way things are going, the lower breakout may be more likely, however the price is still trading much closer to the 89 day high. Since System 4 was able to exit this market well before System 3 will be able to, it will be very interesting to see how their bottom lines reflect that difference.

System 5 – 3 Day High/Low Mean Reversion System

Overall Return: -0.62%

trading systemThis was the most active week yet for System 5. The system entered the week holding a long position. The SPY broke above its 5 day line on Tuesday, which signaled the system to exit its long position at a loss on Wednesday. The lag from buying and selling at the close of the day following the signal really seems to be taking its toll on this system. If it could have exited the position on Tuesday, it would have been a much better trade.

After losing its 5 day line on Wednesday, the SPY closed down even further on Thursday and Friday, which gives us another long signal for System 5. Therefore, the system will be establishing another long position at Monday’s closing price. Once again, there is a good chance that the lag from Friday to Monday is going to eat up all of the profit that this system would have made.

System 6 – Simple Moving Average Systems

Overall Return: A: -1.36%, B: -1.36%, C: -1.36%

system tradingI added two more versions of this system this week. Here’s a quick review:

  • System 6A – Long above 200 Day Line, Cash below 50 Day Line
  • System 6B – Long above 100 Day Line, Cash below 100 Day Line
  • System 6C – Long above 50 Day Line, Cash below 100 Day Line

The SPY is still trading above all three lines, however it closed just slightly above the 50 day line on Friday for the first time since it broke through that line in early July. If the market doesn’t bounce back early in the week, the 50 day line is in trouble, and the 100 day line isn’t further behind.

If the SPY does lose the 50 day line this week, System 6C will go to cash. I am also going to introduce versions of each of these systems that go short the SPY on a break below their respective lines.