Best Strategy for the Current Markets

Updated Swing Trading Strategy

The storm clouds burst in the financial markets in early 2018

The skies were blue and clear in 2017. But lightning has hit the financial markets very frequently since then.

2018 has been a year for traders to remember as volatility returned with a vengeance. I was caught out like many people. February and March have left me battered and bruised and longing for a return of calm. The huge moves in the VIX, as well as stock indices, have broken recent records. These extreme moves are frightening and unnerving and cause many traders to abandon their strategies.

My momentum strategies have been too slow for this frenetic pace and I have been whipsawed by political tensions, trade war fears, and presidential tweets.

But despite this, I am always interested to see what has been doing well.

How should we be trading?

Hindsight is a wonderful thing. But for traders, it is vital to understand not only what has performed well but why. In this article, I want to identify two approaches that have performed relatively well and then talk about what my preferred strategy is for these markets.

Short-Term Momentum

It has been a good time for day-traders who are nimble enough to follow the market moves. Short term momentum strategies have been working really well. But my concern about these is that they have not been very effective over the past few years.

Personally, I find day trading a bit too stressful. I don’t like my emotions being stretched by tiny intraday moves. Also, entries and exits must be very sharp. Traders who use automated strategies have an advantage over those who are trade manually. But the automation must be good and also needs to be monitored.

Swing Trading

For those traders who prefer a slightly slower pace, swing trading has also done pretty well in 2018. I like swing trading on the daily timeframe. Trading against short-term moves in the direction of the main trend.

Trading against the extreme moves has provided some good entries as well as a few bad entries in 2018. But overall it has performed well compared to other approaches. The advantage I see of using this strategy is that if the markets get calmer the strategy should continue to perform well.

Updated Swing Trading Strategy

I originally introduced my simple swing trading strategy in this article A Simple Swing Trading Strategy back in 2016.

The idea of the strategy is to deal with the tendency of markets to reverse direction before moving strongly in the opposite direction. The entry uses a simple candlestick entry system. I measure the size of the body of the candle (Open-Close) as a percentage of the full size (High-Low). I enter Long when the market has a down candle and Short when the market has an up candle.

The filter is defined by the linear regression line. The linear regression is the best fit straight line through a series of price data. When the line is pointing upwards I enter long. When it is pointing downwards I enter short.

The entry signal is defined by a full bar in the opposite direction to we what we want to trade. This simple entry system is highly customizable. If you want fewer but more reliable trades you could wait for two bars, if you want more trades you can adjust the filter to get more frequent trades. To see me demonstrating this have a look at the video below. The model also includes a filter for Long-Only trades.

Position Sizing

Almost all Tradinformed models use the ATR (Average True Range) to guide the stop-loss and position size. The ATR measures the size of recent bars and is a guide to recent volatility. This means that when the market is more volatile, as they did in 2018, the stop-loss is widened and the position size is smaller. When the markets are calmer, the stop-loss is tightened and the position size increases.

The Results

The results here are based on the Long Only Strategy using data from 2000-2018. Positions are closed by a 3 * ATR stop-loss, a close above the upper Bollinger Band line, or a candle in the opposite direction.

Metric Result
Gross Winning Trades $406,915
Gross Losing Trades $-223,225
Net Profit $183,690
Net % Gain 113.0%
Profit Factor 1.82
Winning Trade 149
Losing Trades 58
Win Percentage 72%
Average Winning Trade 2,731
Average Losing Trade -3,849
Largest Winning Trade $14,935
Largest Losing Trade $-8,565
Max Drawdown 12.2%

If you are interested in watching me review these results and try different options, I recommend that you watch the video below.

Get the Model

You can purchase the model that I use for this analysis in the Tradinformed Shop. The model that contains the Swing Trading Strategy is here: The Advanced Backtest Model.

Video

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