Some Cursory Back Tests

My last two articles “In Search of Nirvana” and “Casual Observations“, I began outlining a potential methodology for trading sectors utilizing the S&P SPDRs. The initial thought was to use one of my proprietary indicators “Buying Power/ Selling Pressure” as keys to defining impending up-trends and down-trends. We could then trade utilizing other technical indicators such as the SAR or Chandelier as a for instance only with the trend. I started with the S&P small caps IJR.

The horizontal line in the indicator box is the 50 level where buying power/selling pressure are in balance. As you can see from the highlighted area most often the buying and selling are pretty well matched vacillating around the 50 level. When one side breaks above it indicates a potential change or continuation of the trend. Notice how in early June the selling pressure broke out indicating, in this instance, a potential change in trend which happened to occur in short order.

You would suspect that a mere trade above 50 would indicate something. It does not. We need more power or pressure. Suppose we said that if the buying power rose 4% above that threshold we would buy and hold until the Selling pressure rises to that same level, what happens?

Since early 2000, and staying with IJR we have the results below. For an explanation of each statistic visit: Statistic Definitions

106 trades over approximately 17 years time with 61+% winners and an average gain of 0.9% and an average 17 day holding period. We have a positive expectancy, that is good, however, the returns are somewhat lackluster and the draw-downs too large. This is just the very beginning of this project.

Next week I will look at trading this method within a our defined bull trend methodology, perhaps on a portfolio as well as an individual equity.  We are experimenting here, nothing more at this point in time so stay with us on this project.