Strategy 4 – Beats the buy-and-hold SPY benchmark in profit and max drawdown.
This strategy uses RealTest for backtesting. It made $1.2 million on a universe of stocks (S&P 100) over the last 10 years, has a profit factor of 1.89, a Sharpe of 1.17.
Disclaimer: the following post is an organized representation of my research and project notes. It doesn’t represent any type of advice, financial or otherwise. Its purpose is to be informative and educational. Backtest results are based on historical data, not real-time data. There is no guarantee that these hypothetical results will continue in the future. Day trading is extremely risky, and I do not suggest running any of these strategies live.
This is the first time I have used the RealTest program to research a trading strategy, and so far, I can say the experience has been quite pleasing. In today’s strategy, I use the MACD indicator from the previous articles, but with a small tweak. The strategy also includes the use of volume, the average true range, and a moving average. Sexy, right?
This strategy may have been tested in RealTest, but there is nothing special about the program or this strategy logic that can’t be converted into another program. It is run on a daily chart (RealTest doesn’t support intraday charts) and uses Yahoo data to test. RealTest supports getting data from Yahoo, Tiingo (which I intend to use to test strategies on crypto), and Norgate (which I will probably switch to using for stocks and futures in the near future).
I talked about simplicity in the last post, Strategy 3. Not surprisingly, that concept is carried over into this post, too. When I started working on this strategy, I attempted to create a MACD and ADX strategy. It wasn’t working as I expected it to, and as I continued to try and force it, the strategy became more complex and likely overfit. Eventually, I dropped the ADX indicator altogether and was much happier with the strategy and results. Sometimes, all you need is a hammer…
Damnit, Larry. Are you about to incorporate more lessons from your completely unrelated experience and time as a paramedic?
Yes, other Larry. I’m glad you’re picking up on the pattern. It’s nice to see you decided to come to class.
Lessons from the Past
There are all sorts of hand tools that one can carry with them on a mission/call. A standard breaching kit has 3 tools: the sledgehammer (my favorite), a pry tool (Halligan), and an axe. These tools are used to open doors (or create them) that don’t want to be open or aren’t meant to be open (by you anyway). Which one depends on your job title. There are a million different techniques that can be used with those three tools. However, most of the time, the simple sledgehammer will get the job done faster.
I know that statement will upset some firefighters, but it’s true. Firefighters believe in the almighty set of irons (a Halligan and an axe). With these tools, a lot of pressure can be created to pop a door. There is a technique involved in using those tools together, and it usually requires two people to do it properly. While those two knuckle draggers are working out how to pop open a door, my trusty sledgehammer and I have already made access into the room, whether through the door or the wall. We always comment about the guy who only sees nails, but sometimes, there are only nails, and we all know exactly what a nail needs – a hammer.
The purpose of this is to say don’t sleep on the hammer. A lot of work can get done with a simple hammer. I would venture to say that more work can get done with the hammer than with the scalpel. The hammer is adaptable and applies to many different scenarios. The scalpel belongs in the hands of the skilled. Sometimes, they are so skilled that they are useless in more scenarios than useful.
Hell, in my anecdotal experience, I have never seen or even heard of an ER doctor performing well outside the ER, and they are supposed to be multi-tool doctors. In their defense, most of them perform poorly in the ER, so expecting that they can keep their heads on a scene (in an uncontrolled environment) is a bit unrealistic.
Back to the Present
And that’s why I dropped the ADX indicator from this strategy. It was useless. At least, it was useless in the way that I was attempting to use it. I’m actually not super impressed with the ADX indicator in general. If you go back and look at the simple research I conducted on it in the Average Directional Index article, we didn’t see any specific ranges of the ADX that showed predictable returns. It showed some promise when being used alongside the RSI indicator, so I might revisit that strategy and see if it can be improved.
With that out of the way, let’s move on to the topic at hand.
Backtest Results
The benchmark used to compare these results is a simple buy-and-hold strategy on SPY. The first table shows a handful of common stats associated with strategy results. After that, we have a few graphs for visualization of results. This strategy is run against all the stocks in the S&P 100 list. GitHub has a simple script that I use to create the list of the symbols for this strategy.
Addendum:
The results shown here are from the “optimized” version of this strategy. The only variables I optimized were the slow and fast EMA’s used with the MACD. The results for the strategy with the standard 12/26 EMAs are still pretty good. This version just has a better drawdown.
Summary Stats:
Equity Graph:
Drawdown: The max drawdown on this strategy may be lower than the benchmark, but this graph shows that the average drawdown is likely higher than that of the benchmarks.
Monte Carlo Analysis: This shows the top/bottom 5 results out of 100 samples.
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