Live System Trading

trading systemsBecause there are so many biases that come into play when backtesting (and because I have no clue how to backtest correctly), I thought it would be a cool idea to actually attempt to trade a few different types of systems. This creative experiment has growth into a weekly post documenting the transactions and returns of six different trading systems.

I am hoping that the results of this live system trading experiment will demonstrate that it is possible to significantly beat the general market indexes by following very simple systems with easy to understand rules.

Weekly Analysis Posts:

The Systems:

I am currently running my comparisons on six different systems. Each system has its own trading rules, but as systems go, they are all relatively simple. There are many improvements I could make to these systems, such as trend filters and trailing stops, but I want to keep them as simple as possible just to see what happens.

System 1 – Buy & Hold SPY

System 1 represents the most basic system of all: buy and hold. While this is a bit of humor for serious system traders, we have to remember that simply buying and hoping the market goes up every day is an actual strategy that is used by a huge number of investors.

There are no transactions with this system. We simply purchased about $10,000 worth of SPY at an arbitrary start date and are hoping to see a positive return in the long run. While this system won’t provide any actual trading examples, it will serve as a benchmark for us to compare each of the other systems to.

System 1 is how my mother invests, and if I am ever going to convince her to try something more active, I will have to be able to show her that better results are possible.

System 2 – IBD Market Calls

System 2 is designed for the investor who likes owning the general market, but is looking for a way to make sure that they are in cash when the big crashes and recessions happen.

The A version of this system goes long SPY when IBD calls a Follow Through Day and goes to cash when IBD switches their market call to Market In Correction. This should provide an easy to follow way for part time investors to glance at one ting everyday and keep their savings safe during bear markets.

The B version, which will trade a bit more frequently, attempts to get out of the market sooner by going to cash every time IBD switches their market call to Uptrend Under Pressure. This version should be quicker to lock in profits, but will also trigger more false signals.

The C version is basically the same as the A version, except that it goes short instead of going to cash when the market goes into a correction.

The D version is similar to the B version, but it goes short when the market goes into a correction.

System 3 – 10/100 Moving Average Crossover System

System 3 is a simple moving average crossover system. It uses the 10 and 100 day simple moving average to contrast short and long term price movements. This is one of the most basic examples of a trend following system.

The system signals a buy or sell anytime the two moving average lines cross. When the faster moving average crosses above the slower moving average, the system buys. When the faster moving average crosses below the slower moving average, the system goes to cash or a short position.

System 4 – 89/13 Day Breakout System

System 4 is the 89/13 day breakout system that was featured in the appendix of Michael Covel’s Trend Following. The system establishes a long position when a market makes a new 89 day high, and establishes a short position when a market makes a new 89 day low. The system then exits those positions when a 13 day high or low is hit in the opposite direction.

A similar breakout system was featured in Andreas Clenow’s Following the Trend. Clenow used a 50/25 day breakout system and received similar returns to the system profiled in Covel’s book. Breakout systems are very popular among trend following system traders.

System 5 – 3 Day High/Low Mean Reversion System

System 5 is a mean reversion system that was profiled in High Probability ETF Trading by Larry Connors and Cesar Alvarez. The system looks for a trending market where the price begins to falter a bit. It enters a position assuming that the price will revert to the mean.

To implement this system, we use a 200 day moving average line to determine long term trend direction. Then, we use a 5 day simple moving average to signal diversion from that trend. Whenever a market in a long term positive trend closes with lower highs and lower lows three days in a row, and closes below its 5 day line, System 5 establishes a long position. That position is then held until the market crosses back above its 5 day line. The same strategy applies on the short side as well.

This mean reversion system attempts to pick up lots of small gains at a very high success rate. The downside, however, is that it leaves positions open ended and can rack up some catastrophic losses given a perfect storm. I am not sure that this system can be traded successfully, but it should provide an interesting contrast to the other systems.

System 6 – 200 Day SMA 

This is a very basic system that I expect to perform similarly to System 2. System 6 simply holds a long position when a market is trading above its 200 day simple moving average. It closes that position when the market crosses below the 200 day line and either goes short or goes to cash.

This is another attempt at constructing a system that my mother could trade by simply looking at one single indicator every day. If she could significantly outperform her current strategy (System1), she would jump at the chance, but she has no desire to do any more work, so it would have to be simple to execute.

There are six versions of System 6, here is a quick reference guide to their differences:

  • System 6A – Long above 200 day SMA, Cash below 200 day SMA
  • System 6B – Long above 100 day SMA, Cash below 100 day SMA
  • System 6C – Long above 50 day SMA, Cash below 50 day SMA
  • System 6D – Long above 200 day SMA, Short below 200 day SMA
  • System 6E – Long above 100 day SMA, Short below 100 day SMA
  • System 6F – Long above 50 day SMA, Short below 50 day SMA