Sunday 4 February 2018

Buy the red candle strategy


We have seen how the indexes around the world have been raising since the financial crisis. Obviously, the best strategy was buying in 2009 and holding. I’d like to introduce a trading system based on buying at the final of the day if the underlying is down “X”% and selling before the close of the following day.
In order to make it simple and with statistical meaning, I decided that the system would buy when the underlying security is down 0.20% or more.
The underlying
I´ve chosen the Vanguard S&P500 ETF that is an exchange-traded fund that tracks the S&P 500 index. The ticker is VOO.


     VOO, daily

The period studied is from 2012. As you can see this ETF has doubled like the S&P500.



     VOO daily returns own elaboration

The most part of the daily returns were positive for the period studied. I would like to highlight that there were more down days in the first 4 years (2012 to 2016) than in the last 2 years. As you can see almost every negative day trigger the signal to buy.

Performance of the system


Now it´s time to check the performance of the system. Sadly is not as good as the buying and holding strategy. The starting capital is 100000$.


       Trading system statistics own elaboration

The system returns 94$ per day on average. The maximum profit was 4372$ while the worst loss 4634$. I don´t like the fact that losing this amount of money in a day so it would be interesting to set up a reasonable stop loss. The system returns 43084$ in 6 years without considering commissions. The winning trade ratio is not that good, but we can optimize the target return to trigger the signal in order to get better results in terms of performance and risk. The Sharpe ratio is not that good.


       Maximum Drawdown own elaboration

The maximum drawdown was 13269.14$ which was the equivalent of 11.90% of the portfolio. As far as the drawdown is below 20%, I’m happy.


    Portfolio performance own elaboration

It has grown consistently but as I said before I would like to see a smooth line. Adding a stop loss can improve the trading system.

Sum up


We have seen a simple trading system. Sadly on this occasion, its performance is worse than its benchmark. There are a lot of things in which I can improve this system such as adding a stop loss or modify the return that triggers the signal. We need to be careful with the overfitting. In addition, the commissions are not included in the trading system. I hope you like it.

Have a good trading!!



Disclaimer


I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#ETF #performance #Rprogramming #risk #S&P500 #systematictrading #Trading #Vanguard

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