Trading Systems Are Boring

trading systems

trading systemsDespite the growing drama around the world, the SPY went up for four straight days this week. Despite all the negative news and positive action, none of our systems signaled any moves this week. Not one single transaction.

This does a great job of illustrating just how boring and emotionless system trading can be. If you watched any amount of financial news in the past week, you might have felt compelled to make a number of different trades depending on what you heard. Systems don’t watch the news. They don’t care about world events. They just trade when price movements generate specific signals. That’s it.

While none of our systems made any moves this week, many of them did have open positions. The ones that were long benefited from the market’s gains, the ones that were short took losses, and the ones that were in cash remained unchanged. Interestingly, the systems that took losses were last week’s leaders and the systems that logged gains were last week’s bottom feeders. This brought the entire collection closer together.

Comparing Our Systems

trading systemsDespite the lack of transactions this week, there was some movement in our system comparison rankings based on the movement of some existing positions. With the dramatic gains logged this week, all of the systems that were holding long positions were able to record better returns than the systems that had either gone to cash or short positions.

All of the systems that have been long since this experiment started were the bottom feeders last week. This includes System 1, System 3, and the 100-day and 200-day versions of System 6. Because of the big gains this week, each of these systems was able to jump over System 2A, System 4, and System 6C because those systems remained unchanged.

Last week’s leader, System 2D, gave back a good bit of its profit this week. This allowed System 2B and System 5 to overtake it while they remained unchanged. We are still working with a very small sample size, but it is interesting to note that each of the top four systems have spent as much time in cash or short positions as they have in long positions.

System 1 – Buy & Hold

Overall Return: -1.25%
Last Week: -2.68%

trading systemsSystem 1 recouped a good bit of last week’s losses this week. The system came into the week down 2.68% and finished the week down only 1.25%. Of course, since this is a buy and hold portfolio, the entire return, good or bad, is in the hands of the general market. This week, it was good.

Moving forward, System 1 will continue to hope for the market to go higher. It has no way of defending itself from any downturn, crash, or recession. It is simply banking on the fact that, on average, markets generally move higher over time.

System 2 – IBD Market Calls

Overall Return: A: -1.38%, B: +0.61%, C: -0.94%, D: +0.24%
Last Week: A: -1.38%, B: +0.61%, C: -0.23%, D: +0.97%

trading systemsBecause IBD did not change its market outlook this week, each of the four versions of System 2 held their positions either in cash or short the market. Here is a quick reminder detailing the different versions:

  • 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

Systems 2A and 2B both came into the week in cash positions. Because of that, they remained unchanged and did not benefit from the market’s gains this week. Systems 2C and 2D came into the week short the SPY, which led to them giving back most of their gains from last week.

In the coming week, we will be looking for a Follow-Through Day, which will signal each of the four versions to establish long positions. If we do not get a Follow-Through Day, each of the systems will remain with their current position. This is no big deal for the cash positions, but it could be negative for the short systems if the market were to slowly climb higher without a Follow-Through Day. However, it is highly unlikely that the market will continue higher without delivering a Follow-Through Day eventually.

System 3 – 10/100 Moving Average Crossover System

Overall Return: -1.25%
Last Week: -2.68%

trading systemsBy still holding its long position, System 3 was able to benefit from the market’s gains this week. It improved its overall return to -1.25% compared to -2.68 last week.

It has been interesting to note how my opinion on System 3 has changed from week to week. On down weeks like last week, I find myself wondering if the system might be better off with shorter moving averages to better protect profits. On up weeks like this past week, I find myself impressed that the system was able to ride out a short term slide.

The SPY was able to retake its 50-day moving average this week and is now trading a good bit above it. However, the 50-day line is still trading very close to the 100-day line. If price were to take a U-turn and head back down, when the 50-day line broke through the 100-day line System 3 would either move to cash or short the market.

System 4 – 89/13 Breakout System

Overall Return: -1.97%
Last Week: -1.97%

trading systemsThis was yet another week of watching from the sidelines for System 4. After closing last week sitting right on its 89-day moving average, the price moved a good bit higher this week. It is still well below making a new 89-day high.

It has only been about six weeks, but System 4  has been pretty boring so far. This had me thinking that maybe a shorter term breakout system would be more interesting to trade,  however since the market has been pulling back from very recent highs it is more likely that this is just a poor time to be trading a breakout system.

Just like the last two weeks, we are closer to a new 89-day high than we are a new 89-day low. It doesn’t seem very likely that we will hit either in the coming week, but it would be nice to see the market find its footing and continue trending towards a new high. On the other hand, it could be just as productive for System 4 if the market were to fall apart and crash towards a new low.

System 5 – 3 Day High/Low Mean Reversion System

Overall Return: 0.25%
Last Week: 0.25%

trading systemsAfter losing its 5-day line on a big down day last Friday, System 5 came into this week looking for two more down days in a row to signal a long position. Instead, the market jumped back above the 5-day line on Tuesday and never looked back. This left System 5 sitting in cash all week.

Because we posted four straight up day this week, we could possibly be looking at a nice setup to start the week with three straight down days next week. Of course this is pure speculation, and it would have to actually happen before we actually made a trade.

One of the things that I always say about mean reversion systems is that I don’t like the open ended downside of their positions. However, I should point out that System 5 has posted positive returns over the past six weeks while only making two quick trades. It spent the rest of that time safely in cash.

System 6 – Simple Moving Average Systems

Overall Return: A: -1.25%, B: -1.25%, C: -1.58%, D: -1.25%, E: -1.25%, F: -1.26%
Last Week: A: -2.68%, B: -2.68%, C: -1.58%, D: -2.68%, E: -2.68%, F: -0.91%

trading systemsHere is the quick reminder about the six different versions of System 6:

  • 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

The SPY closed out last week sitting right at its 100-day moving average. It bounced right off of that line this week and closed the week right below the 50-day line. This means that Systems 6A, 6B, 6D, and 6E all were able to recoup a good bit of the losses they posted last week. System 6C remained unchanged because it is sitting in cash, and System 6F lost a portion of last week’s gains because it is still short.

In the coming week, the SPY is either going to continue higher and break through its 50-day line or bounce off of that line and head back down. If it does break through the 50-day line, Systems 6C and 6F will both go back to long positions.