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

5,888
57
  42
  73.68
  -6.38
  1.03
  202
  (174)
  3.26
1.16

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.


3 comments:

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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