Mechanical Trading for Profits

While discretionary day trading is a lot of fun, it is very time consuming and can be psychologically brutal. Thankfully, there are multiple ways to make money in the market.

A less stressful trading method is to use a mechanical system for swing trading using end of day prices, thus negating the need to stare at a computer screen all day. Well, okay, you probably do that anyway, but you don't have to do it to make money in the market.

With the girls off to grandma and grandpa's in Michigan, I used some quality quiet time Thursday evening to dust off some mechanical filters over at StockFetcher.

One of my favorite filters is the triple moving average crossover, which Marlyn at Filtering Wall Street created. Marlyn was one of the first visitors to my humble blog and he provided a tremendous amount of encouragement and help during my initial foray into trading. Marlyn doesn't post any more, but his blog is still up and I highly recommend spending a couple evenings reading all of his posts, you will learn a lot. The link is on the right.

My task tonight was to update my backtest results for the crossover filter to find out how it has been performing in the 2008 bear market. Has it handled the volatility reasonably well? Or has it crashed and burned with the market? (I haven't been swing trading the filter, but I do use it for day trading.)

Before I share the updated test results, here is the code for the filter.

The filter looks complicated, but it is fairly simple. In essence, the filter issues a buy signal when the price opens below the EMA 4, 8 & 21, and then closes above the EMA 4, 8 & 21. The objective is to catch stocks at the beginning of a new move up.

To narrow the stock universe to something more manageable, only stocks priced between $10 and $35 with average volume of 500,000 shares are used. According to Marlyn's research, these stocks provide the average trader with the best opportunities for reasonable profits.

You can delete the price and volume restrictions, but you'll end up with a bunch of penny stocks, so broaden the parameters if you want, but don't eliminate them entirely.

Now, the backtesting parameters:

Test Period: Jan. 1 to March 27, 2008
Stoploss: 8 percent
Maximum Holding Days: 5 (all trades closed at the end of day 5)
Maximum Trades Per Day: 5
Maximum Open Positions: 5

And now, the results:

Trade Statistics
There were 60 total stocks entered. Of those, 55 or 91.67% were complete and 5 or 8.33% were open.
Of the 55 completed trades, 27 trades or 49.09%resulted in a net gain.
Your average net change for completed trades was: 1.02%.
The average draw down of your approach was: -4.74%.
The average max profit of your approach was: 5.74%
The Reward/Risk ratio for this approach is: 1.42
Annualized Return on Investment (ROI): 58.03%, the ROI of ^SPX was: -42.42%.

Exit Statistics
Stop Loss was triggered 11 times or 20.00% of the time.
Stop Profit was triggered 0 times or 0.00% of the time.
Trailing Stop Loss was triggered 0 times or 0.00% of the time.
You held for the maximum period of time (5 days) 44 times or 80.00% of the time.
An exit trigger was executed 0 times or 0.00% of the time.

In short, the filter is smoking. Did you notice the 58 percent annualized return even with a measly 49 percent win rate? Not too shabby. I think it is time to start swing trading this puppy.