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

DBK Trading System

Deutsche Bank is one of the biggest banks in Europe by total assets. During the last years, it has been struggling to adapt to the new low-interest rate environment.The losses from the financial crisis were very big. In addition, the big provision for fines and lawsuits drove its profitability to the negative side. Therefore, its shares have been dropping these years. In response to these problems, John Cryan, Deutsche Bank CEO, decided to implement a restructuring plan some years ago. 

    Source: TradingView, Deutsche Bank shares, daily

Even with the above, I believe that this bank offers value from a trader or investor’s perspective. Analyzing this bank is not the purpose of these post.  

Trading System Intro

I consider Deutsche Bank as one of the most important banks around the world and I believe it will be a reference in the coming years after resolving its problems. This is why I created a short-term trading system to buy the weakness of the stock. The system is based on risk management, the maximum risk taken per trade is 1% while the take profit is set at 10%. With these numbers in mind, we can expect a lower rate of successful trades.

Backtesting from the 30/10/2013 to 17/11/2017

Let’s see the theoretical behaviour of the system

     Statistics of the DBKT trading system, own elaboration using R Programming

The system makes 84.20 EUR per trade on average which is 0.8420 EUR per share considering that it trades 100 shares each time.  The distribution of returns is not as good as I would like it but I expected this problem before I tested the system. The biggest profit was 2290.05 EUR. The worst trade lost 478 EUR. It would have made 5304.77 EUR profit which is the equivalent to 26.52%. It’s a modest return but as we will see later it’s adjusted by risk. The Sharpe Ratio is good.

       Return’s distribution, own elaboration

Sadly some of the returns were worse than the max loss of 1%. This was due to the gaps in the opening. There are ways to solve this problem but it’s interesting to see this kind of problems in order to avoid miscalculations in the future. 

     Max drawdown and performance of the system, own elaboration

As you can see the worst loss was 2773.79 EUR which was the equivalent of a 12% loss for the portfolio.  However, the rise of following days offset the loss and drove the system to profitability. After that, the system was steady without important changes.

      Portfolio evolution, own elaboration

To sum up

We have seen a simple trading system applied in DBK equity. I would like to remind that analyzing this company wasn´t part of this post. I've chosen this security for its volatility. This system hasn´t been improved and it had some problems addressed above. The performance is good considering the 12% max drawdown. I've played with different portfolio sizes before publishing this post but I thought that the 20000 EUR portfolio was the best in terms of risk-reward. A 10k EUR portfolio would have returned 40% profit with 23% max drawdown but I prefer smaller drawdowns. 

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