Tuesday, May 17, 2011

Ideas from Stocktwits: Testing Lower Highs on the SPY

I saw an interesting tweet today from @MarketTells:

"5 consecutive lower highs for S&P futures ($ES_F). Since '08 19 separate occurrences, 16 led to higher S&P 2 days later $$"

As a mean reversion guy, these are the kind tweets I like. Many of my short term indicators are very oversold. SpyderCrusher is talking bounce. ZorTrades has indicators that are anticipating a bounce. Woodshedder over at IBC is expecting a pop as well. So I'm not bringing much profound information when I say: I think a bounce is coming. The purpose of this post is to expound on @MarketTells tweet. I haven't done much testing on SPY price action in regards to lower highs, lower lows, etc. This got me intrigued. A lot of my ideas are spawned by someone else, so hat tip to him. I wanted to test this 'lower highs' idea using $SPY (not $ES_F) on a longer timeframe and turn it into a basic system. So here it is:

Buy when SPY when it has 5 consecutive lower highs; sell after first higher high. $10,000 per trade; 1995 to present.

Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio


Yahoo! Finance data. Trades based on close.

This is a pretty bullish event since 1995. Win rate, profit factor and payoff ratio all look good in my book, and I can deal with the DD. I was already long the SPY, so this test added some conviction. This is basically how I trade. Get an idea, backtest it, combine it with similar ideas, then trade it. I like buying weakness and selling strength; that's my style, but it's not for everyone.

The average hold on this system is about 3 days. After this bounce comes (looking good for 5-18-11 as Futures are up 5 points right now), who knows where the market will go. I just try to stick to high probability trades, and now I've added another to my repertoire. This is further confirmation that Stocktwits and Twitter are a great place for information and can add value to your trading game.

Good trading out there. Position size accordingly.


derek said...

This looks really interesting. What stoploss did you use in the backtest?

Chris said...

No stop losses used here

Mike said...

Indeed, another great post on trading system. I want to invest some money in Forex trading. I am looking for some advice as I am beginner in this field. Thank you!
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