A Trader Journal

Change yourself, change your trading.

A Calendar Trading Strategy....

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This post creates a simple calendar trading strategy by combining some of the edges/odds from various day of month tests we did in prior posts. If this is your first visit, then it might be useful to see those calendar based test posts (and the results) and then come back to this. As part of that series, we covered day of month edges without any filters and later under various regimes like trend, volatility, mean reversion, price pattern etc.

Now there are multiple ways one can combine these edges so that the little edges/odds fit together to create a bigger edge. I think two crucial ingredients for a calendar strategy are (a) figuring the right combination of odds/edges and (b) detecting early on when the strategy edge fades (see red thick lines on chart). 

Following is one simple way to combine couple of these edges. For example, from prior tests we know last part of the month has better positive edge and lower draw down. Similarly we saw returns were better in bull market regime compared to bear market regime. Similarly mean reversion days produced better returns than non mean reversion days. So how about we combine couple of these individual edges?
Day of Month performance profile
- Trend & MR Regime

Test: 
Buy @ market the next day open if - 
  (a) Today is an MR day (and) 
  (b) We are in bull market i.e., Today's close greater than 200 Simple moving average.
  (c) Today is near end of the month. (See Equity Curves image for top 5 days).
Sell @ market the next day open after 5 trading days.

Caveats: Results are friction-less i.e., no slippage & no commission.

Duration: 1970 - 2012 Sept.

Some notes...
The bar plot panel shows the performance profile for all days of the month. The days near the end of the month have better profile then other days of the month. 

Performance Summary - Top 5 days
The performance summary image shows the cumulative return, max drawdown and monthly returns for top 5  calendar days during test period. It is good to see all top 5 days are near end of the month. 

Except for one, the max drawdown for these days is less than 10%. Actually one can reduce the drawdowns further by adding one additional filter we covered in prior posts. One red flag to watch in this test - performance of days 26-29 were not in top 5 days. 

Finally, the above test is neither the only way nor the best way to combine the calendar odds to make the edge bigger/better. Prior posts on calendar day series provides the rules for each of the tests and lots of data for interested readers to experiment further.

Wish you all good health & good trading!

App Review - 30 Seconds to Flush Stress

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Recently I came across a nice free app that helps one to reduce the stress and get back into the game quickly with increased alertness, energy level and productivity.

We all know more or less that meditation and cultivating mindfulness is very important to reduce stress and to improve our well being in general. But problem is majority of us don't do a regular meditation/mindfulness practice even after knowing it is highly beneficial to us. The reasons often are something like "I don't have time to meditate", "Meditation is boring", "I don't have discipline to meditate regularly" or "When I sit still and meditate, it makes me more anxious" etc.

I think this app provides a good solution to above challenges i.e., it has 5 short practical exercises for the user to chose one from for the day and each of the exercises takes just 30 seconds. Also the exercises can be done anywhere and anytime of the day. (Note: Don't do the exercises while driving etc). The exercises are simple and designed to interrupt our automatic mindless thinking and bring us quickly into present moment.

There are multiple gateways (breath, sight, hearing...) available to us to come into the present moment. The exercises in the app are designed such that each exercise uses a different gateway to the present moment. All we need to do is just follow the simple instructions given for that exercise. No need of lot of preparation or scheduling a time slot in our calendar etc.

Probably I should favor all exercises equally but for now my favorite exercises are Deep seeing, Deep hearing and Deep breathing. For deep breathing exercise, by the time I do 3-4 breaths, 30 seconds is complete. So 10 deep breaths takes a minute or more. 3-4 breaths is also good enough to see the difference. Deep contact exercise is bit confusing. But that is fine as I do a similar exercise which I picked up in past from one of the Eckhart Tolle's books.

On a side note, given these exercises are so simple, quick and can be done anywhere/any time of the day, it would be great if this functionality is available as a mobile app in future. All in all, I think the exercises are great and beneficial to include in daily routine. Don't let the simplicity of exercises trick you. Best way to evaluate is to just try the exercises and see how you feel immediately afterwards.

Link: 30 seconds to Flush stress

Disclaimer: 
The above are just my opinions and your experience/benefits from usage could be different from mine. I am not affiliated and don't gain anything by others usage of this app.

Study: SP500 Wide Range Bar and 50 day high

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Last Thursday markets had strong up move (WRB) and also a new high. Thought it might be interesting to see how did S&P 500 perform afterwards in last 40 years. 

S&P 500 - WRB & 50day High Test
Test: Close - Open > 2% and Market is at/near its 50 day high.

Caveats: Results are frictionless i.e., no commissions, no slippage.

Duration: 1970 - 2012 Sept.

Thoughts:  From results, it appears market has better than random odds of upward bias after 30 bars (i.e., 1.5 months). On surface it appears market had upward bias in short term as well (i.e., less than 30 bars) but results breakup (i.e., 1970-2000 and 2000-2012) tell different story. More details on the image itself. On side note, I am not sure what's special with 30 bars but it seems to have better odds then other durations covered in the test.

Wish you all good health & good trading!

Part4: Calendar day returns by Price Action for S&P 500

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This part of the series examines the calendar day of month returns profile by price action of the underlying index (S&P 500). You can find earlier posts of this series here - Part1, Part2, Part3. Now price action of a market can take many forms (patterns). 

So as a starting point, for this post, I classified price action into two categories - mean reversion (MR) and non mean reversion (Non-MR). In later posts, my intention is to cover specific patterns like Toby Crabel NR7, NR4, Hook etc. 

Some Definitions:
  • MR Day - Today's close is lower than close two days ago.
  • Non-MR Day -  Today's close is higher than close two days ago.
Tests:
  • Calendar returns by MR Day - If today is an MR Day, buy @ market the next day open and sell after 5 days.
  • Calendar returns by Non-MR Day - If today is a Non-MR Day, buy @ market the next day open and sell after 5 days. 
Test duration: 1970 - Current.  
Caveats - Friction less results.
 
Results:
Calendar returns by MR Day shows good positive edge around 3rd week of the month inline with other studies. 

Calendar returns by Non-MR day shows positive edge around 9th/10th day of the month. I have to check again other posted results to see if the edge shows up there also. For now I don't think it is as good as the other edges though. 

What else do you see in the results?

 Side note:
Originally I started the series with intention to validate and to create a better "End of Month" strategy. Some savvy readers might have noticed by now that one can develop multiple strategies from the results of these studies and not just "End of Month" strategy. For example, do you notice any thing particular in the results of the last post? Also one can build day trading strategies like Opening Range Breakout (ORB) building upon these type of studies. So my revised thinking is to keep this series going focusing on calendar day performance profile by various criterion and do some strategy posts as a separate series in parallel. Thoughts? Feedback?

Wish you all good health & good trading!

Part3: Calendar returns by Volatility regime

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Continuing the series, this part examines the calendar day of month returns by volatility regime. You can find the prior two posts here and here. Now classifying volatility regimes into various levels is bit tricky. Often the approach taken is to measure and divide the volatility of market into static levels to classify as high/low/medium etc. Example: VIX level below 15 as low etc or historical volatility ratio above 30 as high etc. My preference is to use dynamic metrics that both adapt with market character and are also relevant to the cycle length of the strategy being evaluated.
 
Volatility Regime:
For this test, my definition of volatility regime and classification is as follows - Calculate the 50 day historical volatility of the underlying market. Then calculate the percentile rank of historical volatility for today in relation to last 20 days volatility. Then place current day volatility rank into one of the four buckets - (0-25), (25-50), (50-75) and (75-100).  

Range 0-25 is the lowest volatility bucket, 75-100 is the highest volatility bucket and rest in between. There is nothing special about dividing the volatility range into 4 quarters. We could have as well classified into 3 parts or as 5 parts. 

 Test:
The test details are same as described in the first post except for one extra condition i.e., take trade only if today's volatility rank is in (0-25) bucket (for calendar strategy test in low volatility regime). Same for others volatility ranges. Same caveats as in prior posts apply here.

 Results discussion:
I have intentionally left discussion of results in this and prior posts. My thinking was it is more fruitful for everyone to see the raw data, derive own conclusions and share with me & other readers your thoughts in either comments/LinkedIn discussion threads of this blog. That way I also gain new insights and learn something from you on these studies/concepts strength and weaknesses.

Thoughts on Max Drawdown..
On surface, the drawdown numbers of these studies appear quite high. So it is natural to write off and move on to something else. Unlike other studies, I am developing this strategy as I go along.  So I don't know yet the direction this series takes or what the final numbers look like. But I think pursuing the concept is still promising for following reasons.  

The strategy shows consistently positive edge (see this and last 2 studies) during certain days of the month for last 40 years. And the positive edge shows up on days different from conventional wisdom regarding End of Month strategies. For things related to market, I generally like stuff that either majority ignores or goes against their understanding.


Also at this stage we are just assessing whether the concept has positive edge or not with a dumb entry & exit tactic. There are several things one can do to reduce max drawdown significantly by the time strategy reaches final stages like fine tuning of entry tactics based on price action/stop losses/dynamic exit tactics/equity curve based money management/position sizing based on regime/volatility etc.

Third reason is the correlation of this to other methods. I have not yet done study but conceptually it appears to me this strategy results will likely have low correlation to other timing approaches and to SP500 returns. That makes the strategy  pretty potent.For an idea, see the strategy diversification study (posted on blog couple weeks back) and the performance graphs (cumulative returns, max DD etc) of individual systems and combined portfolio. See also time diversification study.

 Readers

I look forward to hear your thoughts and suggestions. We learn most when our views differ. So feel free to share your thoughts and more so if your views are opposite to above or on aspects not covered by above post.

 Wish you all good health and good trading!

(Correction: Sept-04-2012...Updated the post with correct results image)


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