Two Swing Trade Systems (Part 2)

Click to view larger.

Yesterday I discussed two swing-trade systems that work pretty well in out-of-sample data. While each works differently, they overlap enough that you don’t get any benefit from running them both at the same time. One great thing about these two systems is that they’re dead simple to manage. Trade at the open or the close, simple math, etc etc.

I will repeat the caveat from yesterday: these trades average <1% gain per trade. You must have sufficient capital and/or a low/nonexistent commission fee to make these work. While you can use leveraged ETFs or account leverage to help increase the profit/commission ratio, you also increase your chance of a catastrophic hole in your money.

In the lead image, you can see that I have indicators for both RSI and PIRDPO. PIRDPO occurs more frequently, and the RSI trades are a complete subset of the PIRDPO trades (during this particular time frame). There is no benefit to trading both systems.

Continue reading Two Swing Trade Systems (Part 2)

Two Swing Trade Systems (Part 1)

In my recent posts I’ve made reference to various swing-trade systems I’ve developed, which I’ve used as data to discuss things like correlation, diversification and the value of leveraged ETFs. I’ve had a number of people say “hey, what are these systems you’re referencing?” The short answer is: they’re not something I’m discussing publicly. “But that’s not fair!” you cry. “Everything should be free!” Yeah OK, I see your point.

Continue reading Two Swing Trade Systems (Part 1)

“These Aren’t The Gains You’re Looking For” (Leveraged ETFs)

“These aren’t the droids you’re looking for.” (Flickr/donsolo, CC BY-NC-SA)

Ah…leveraged ETFs. All that beta without all the embarrassment of trying to borrow money from your broker (or cousin) to leverage your returns. Is the regular ETF not volatile enough for you? Buy the 2x version! Still too tepid? Perhaps the 3x version is what you’re looking for.

Unless you’re new to trading though, you’ve probably heard about beta slippage. This is where leveraged ETFs, using a combination of volatility and pesky math, end up losing as compared to their 1x versions over the long haul. Leveraged ETFs aim to provide a 2x or 3x return on an intraday basis as compared to a 1x version (or the index they’re tracking). But, over time, these leveraged returns decay.

For example, let’s take a look at two gold miner ETFs, which track an index of gold miner stocks. We have the plain vanilla version, GDX, and then a triple-leveraged version, NUGT. These are managed by two different investment funds, so we’d expect there to be some day to day discrepancies. Starting at the beginning of 2011, here are the results of a buy and hold approach to each:

Continue reading “These Aren’t The Gains You’re Looking For” (Leveraged ETFs)

Comparing Overlapping Systems (Part 2)

Do your systems overlap?

In the last post, I compared three systems that traded the same instrument (SPY) in different ways, and also compared the combination of the three systems. Combining those systems reduced risk, which allowed us to increase our position size (either through more cash or using leverage). We could then realize a larger profit for the same amount of risk as we’d experience using just one of the systems.

There is still however a risk of our systems being overly correlated. We might end up throwing two buckets of money at the market, when we thought we were just throwing one bucket. How do we figure that out?

Continue reading Comparing Overlapping Systems (Part 2)