The Trading Systems Get Defensive

Defensive

trading systemsThe general market took a decent hit this week, and all six of our systems lost ground on account of that. That makes this week the potential start of defensive mode, where we will get to see which of the systems do the best job of protecting our capital when market conditions get choppy.

It is likely that this is just a bump in the road as the market consolidates its recent gains, however it is still very interesting to see how each of the systems are beginning to differentiate themselves. I added a second version to System 2 this week that gets out of a position when IBD goes to Uptrend Under Pressure. I expect to add a number of other variations to all of these systems in the coming months.

Despite the losses this week, most of our systems are still in positive territory for the length of the experiment. It will be very interesting to see where they go from here!

System 1 – Buy & Hold 

system1-081113

Overall Return: +0.69%

System 1 took a big hit this week. After posting a great return last week, the wheels came off a bit starting on Monday. Tuesday and Wednesday weren’t much better, and the small rally attempt on Thursday was wiped out on Friday as the SPY closed near the lows of the week.

Of course, since System 1 has no rules for getting out of the market, it was forced to endure this loss and any further losses that might be coming. If we were using System 1 as our primary strategy, our game plan for the coming week would be to hope really hard and possible pray for higher prices. Then, we would just sit back and watch what happens.

System 2 – IBD Market Calls 

system2-081113

Overall Return: A: +0.69%, B: +.61%

After the markets saw more distribution on Monday and Tuesday, IBD switched their market call to Uptrend Under Pressure on Tuesday evening. This caused the B version of System 2 to cash out at Wednesday’s close of 169.18. That system is now sitting in cash and will jump back into the market when IBD decides to switch back to Confirmed Uptrend. System 2A does not close a position until IBD switches to Market in Correction, so it remains long.

Since we will have to see some positive action for the market call to return to Confirmed Uptrend, the B version will likely miss out on some gains that the A version will capture by still being in the market. However, if conditions worsen, System 2B will have gotten us out much quicker than System 2A did.

Systems 2A and 2B could go either way in the coming week depending on the market action. It will be interesting to see which system performs better while the market is consolidating its tremendous gains as it appears to be doing right now.

System 3 – 10/100 Moving Average Crossover System

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Overall Return: +0.68%

After flirting with losing its 10 day line two weeks ago and then bouncing off of it last week, System 3 broke down through the line this week. The SPY lost the 10 day line on Wednesday, then regained it on Thursday only to lose it again on Friday.

While we are still a long way from an exit signal, the action of the past week indicates that we may be heading in that direction. One of the drawbacks of a moving average system that only uses two averages is that it will tend to give back a large portion of its gains when the market turns. We could be seeing that here, or we could just be seeing a temporary pause before our uptrend resumes.

Had we backdated our system to the last buy signal, System 3 would be sitting on a sizable gain and losing a portion of it might be easier to swallow. However, since we jumped right into a current trend, a market reversal at this point will send System 3 into negative territory for the year, which would be a pretty unpleasant way to start trading.

In the upcoming week, we will want to pay close attention to how the SPY behaves with respect to its 10 day line. We are hopeful that it reclaims the line and continues higher, but if it sinks further, we will begin watching for our exit point.

System 4 – 89/13 Breakout System

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Overall Return: +0.08%

System 4 was late to the party when we got started as it didn’t receive a buy signal until we were almost a week into our trading. Since it was already lagging the other systems, it took a bigger hit this week, giving back almost all of its profits.

On the defensive side, System 4 is much closer to an exit signal than System 3. The SPY is currently trading just short of 2 points above its 13 day low, and as the coming week progresses, that 13 day low will be going up. If the SPY doesn’t see some sort of rebound this week, there is a very good chance that it will trigger a sell signal in System 4.

System 5 – 3 Day High/Low Mean Reversion System

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Overall Return: -0.29%

System 5 finally triggered a buy signal this week, but so far it hasn’t gone the way we would like it to. The SPY broke through its 5 day line on Tuesday, and after Wednesday’s close it had recorded three straight days of lower highs and lower lows. This signaled System 5 to go long at the following day’s close, which was 169.80.

The fact that Thursday was a bounce back day really screwed up this trade for System 5. With a purchase price that was almost right at the 5 day line, this System is not likely to make much of a profit when it exits the trade on a cross above the 5 day line. Friday’s down day lowered the 5 day line, which makes it even less likely that this trade will end up profitable.

In the coming week, we will be watching for a close above the 5 day line for and exit signal. It is possible that using the following day’s close as an entry/exit signal allows too much time between the signal and the execution. If that is the case, this system will never be profitable if it is used in this manner.

System 6 – 200 Day SMA System

system6-081113Overall Return: +0.68%

System 6 has mirrored System 1 from the start of this experiment. That was the general idea.

Despite having a down week, the general market is still in a long term uptrend. The SPY is in absolutely no danger of losing its 200 day line at this point, so this system has no concerns. However, just like with System 3, we jumped into the middle of a trend, so if the market tanks from here, we will be looking at a large loss on our overall portfolio.