Trading Systems Don’t Care About Printing Money or Ben Bernanke

Trading Systems

trading systems“Blah Blah Blah Ben Bernanke. Blah Blah Blah Printing Money.” – Every Market Commentator This Week

I wasn’t feeling well on Wednesday afternoon, so I spent the afternoon laying on the couch watching TV. While my memory is kind of blurry because I was in and out of sleep, I do remember a lot of people talking really fast about Ben Bernanke and the Federal Reserve printing money.

Fortunately for me, none of this noise on TV affected any of the systems I have been trading, so I was able to lay there and focus on feeling better. What made that even cooler is that when I finally got around to checking those systems, they had almost all benefitted from being long throughout the week.

The lesson here is simple. We already know that nothing anyone says on the news will affect our trading. The next step in that line of thinking is that nothing that anyone at the Fed says will directly affect our trading. All of our systems are built to respond to what the market actually does, not what people think it might do.

Comparing Our Systems

trading systemsThe rich got richer among our simple systems this week. Each of the simple trend following systems that came into the week long held onto those positions throughout the craziness of Wednesday, Thursday, and Friday.

Once again, System 2B is the top system. It was able to bank some quick profits at the end of July, then sit safely in cash throughout most of August before getting back into the market when IBD resumed their Confirmed Uptrend a few weeks ago.

Right behind System 2B are all of the systems that have been long for the entire length of this experiment. This provides some supporting evidence for those who argue that the best way to make money is to sit tight through the long-term trends.

Out of the bottom four systems, three of them are down there because they got caught in short positions when the market began to rally. While System 4 was not short, it also missed out on the rally. This could further support the argument that systems that jump in and out of the market too frequently are less likely to trade profitably.

System 1 – Buy & Hold

Overall Return: +1.46%

Last Week: +0.70%

trading systemsSystem one went on a wild ride this week. After modest days on Monday, Tuesday, and most of Wednesday, the market shot higher after the Fed announcement on Wednesday afternoon. Unfortunately for System 1, the market ended up giving back almost all of those gains over the course of Thursday and Friday.

As we say every week, the biggest weakness with System 1 is that it has no way to protect itself from drawdowns. The only option for its buy and hold investors is to sit and watch the market hoping it goes higher.

System 2 – IBD Market Calls

Overall Return: A: -0.35%, B: +1.64%, C: -2.58%, D: -0.20%

Last Week: A: -1.10%, B: +0.88%, C: -3.31%, D: -0.95%

Here is a quick reminder about the different versions of System 2:

  • 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

system trading

All four versions of System 2 were long the SPY coming into the week, and they all stayed with that position throughout the week. IBD is currently showing a count of three distribution days on the Nasdaq and 2 on the S&P 500. This means that the current uptrend is actually pretty secure, despite the down days on Thursday and Friday. Of course, that could change on a dime if we see a few high volume distribution days in the coming week.

It is interesting to note that System 2B has posted the best returns of the four versions because it was able to get out quickest when the market dipped at the beginning of August. It also didn’t get caught in a short position when the market bounced back two weeks ago. On the flip side, System 2C did not get out of its long position as quickly in August, and it did get caught in a short position two weeks ago. Those two things are the difference between being up 1.64% and being down 2.58%. Quite a big swing.

System 3 – 10/100 Moving Average Crossover System

Overall Return: +1.45%

Last Week: +0.69%

trading systemsSystem 3 continued to improve its returns this week as it held its long position throughout the entire week. This system has been long since we started this experiment in mid-July. Because it is a long-term trend following system, it has been able to capture the same profits that buy and hold investors have seen over the past two months. However, the big difference is that System 3 has rules in place that should protect its downside when the market eventually slides.

Looking at the chart, it isn’t likely that System 3 will be generating a sell signal anytime soon. Since its two moving average lines got close in early September, they have moved further apart each week. At this point, it would take multiple weeks of significant losses for the 10-day line to fall back to the 100-day line.

System 4 – 89/13 Breakout System

Overall Return: -3.17%

Last Week: -1.97%

trading systemsSystem 4 was incredibly unlucky this week. It came into the week already down almost 2%, and it was still on the sidelines because the SPY had not yet broken into new highs like the QQQ had. The SPY gapped up on Monday and broke into a new 89-day high, but it didn’t close above that level, so the system didn’t initiate a new position. The SPY then pulled back a bit on Tuesday, so the system didn’t signal a buy until the market took off on Wednesday.

After the buy signal officially happened on Wednesday, System 4 made its entry at the closing price on Thursday. Of course, this just set the system up to take a big hit on Friday. Moving forward, the system will hold its current long position until it gets an exit signal that would be triggered by a 13-day low.

It has been very surprising how poorly System 4 has performed in the first two months of our experiment. The system seems like it keeps just missing and getting slightly unlucky on its timing. Most likely, this is just simple bad luck that will eventually work itself out over time.

System 5 – 3 Day High/Low Mean Reversion System

Overall Return: +0.5%

Last Week: +0.5%

trading systemsBecause of its nature, System 5 didn’t benefit from the big Fed announcement and reaction on Wednesday. It also wasn’t affected by the pullbacks on Thursday and Friday. This system makes its money when markets pullback too far during uptrends, not when they get ahead of themselves.

The big positive this week for System 5 is that it is set up nicely for one of those oversold conditions that it looks for. Thursday and Friday were both big down days that brought the SPY back to its 5-day moving average. However, because Thursday’s open was higher than Wednesday’s close, Thursday is disqualified as one of our 3 days. Therefore, Friday is our first down day and we would need two more on Monday and Tuesday to signal a long position.

If the SPY manages to close down with lower highs and lower lows in the first two days of the coming week, then we will enter long at Wednesday’s close.

System 6 – Simple Moving Average Systems

Overall Return: A: +1.46%, B: +1.45%, C: -2.12%, D: +1.46%, E: +1.46%, F: -5.62%

Last Week: A: +0.70%, B: +0.70%, C: -2.85%, D: +0.70%, E: +0.70%, F: -6.33%

Here is a quick reminder about the different version of System 5:

  • 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

trading systems

Each version os System 6 benefited from being long coming into the week just as System 1 and System 3 did. Much like System 3, versions A, B, D, and E of System 6 are all benefiting from their long term outlooks. They have all been able to capture the same gains that buy and hold investors have benefited from while still holding insurance policies against the market taking a downturn.

It continues to look like trading System 5 based on the 50-day moving average is just going to be too short of a time frame. Each time that the SPY has lost its 50-day line in the past two months, they versions of System 5 that trade off of it have missed out on big profit opportunities. Missing out on those key days has absolutely crippled the short version as you can see from the awful return posted by System 6F.