This is the second article written by Mario Cesolini for Unger Academy. Mario is a trader specialized in the conception, programming and development of trading systems, always looking for the perfect algorithm. The search for new strategies never stops. There are times when everything is hectic and times when everything goes in slow motion.


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From SPY to the “cousins” QQQ, DIA and IWM

In the previous post we introduced the RSI indicator and we have seen how, in its two-period version, it can be a valid ally to take upward positions.

This second article will be dedicated instead to finding out how our trading system, which opens long positions when the 2-period RSI falls below the value of 30 and closes when the indicator rises above the value of 70, behaves with other US share indices like the Nasdaq, the Dow Jones and the Russel2000.

Our idea is that all US equity markets have the same characteristics as the SP500 and, like all ideas, this one will have to be demonstrated.

I am announcing that it is not a question of immediately usable systems, provided we do not want to lose money. In this regard, remember that we are testing a primitive version of the algorithm, without any risk management (stop loss, take profit, …) and, as we shall see, we must not underestimate other “small” problems that make the system unprofitable.

Will the Nasdaq, Dow Jones and Russel2000 indices also feature the same bullish bias and the same mean reversion as the SP500? We will see.

I have tested our system on 4 ETFs:

  • SPY (SP500, we saw it in the first article)
  • QQQ (Nasdaq100);
  • DIA (Dow Jones);
  • IWM (Russell2000);

Below are the equity lines of the system applied to the 4 markets:

SPY – Equity line close to close

 

QQQ – Equity line close to close

 

IWM – Equity line close to close

 

DIA – Equity line close to close

 

Good. Now we can state that the mean reverting logic also works on the other tested stock indices. The 2-period RSI is not a perfect indicator but it has proven to know how to intercept this dynamic.

I repeat, at least for now, this is not a usable system. Above we have mentioned the lack of risk management (which alone would discourage its use). The question is now the following: if the 4 systems were equipped with risk management would they be usable? No, they would not be usable anyway. Let’s see why.

Below is a comparative table of the main ratios of the performance reports.

Ratio Table – 4 ETFs

THE IMPORTANCE OF AVERAGE TRADE

Some of the readers would have already identified the weak point: the low average trade. At least at the moment the average trade is too low to be able to hope to cover the costs of slippage and commissions, especially those of Italian brokers who come to also ask for 22 euros for each trade (11 on opening and 11 on closing). On the other hand, all markets responded satisfactorily: high percentage of favorable transactions and overall a good base to work on.

How is the average trade calculated? Simple: dividing the total net profit by the number of transactions.

INCREASING THE AVERAGE TRADE

A fairly intuitive way to increase the average trade is to be more selective in the entries. In our case we could think of testing levels 10, 15, 20 and 25 or apply a trend filter to choose to operate only if the trend is favorable.

Another solution to increase the average trade could concern the duration of the operations: the more you stay in the market the more you increase the possibility of obtaining profits (of course this is true only if you use a good strategy, if instead we buy on market tops every day would have a negative influence on our trading account).

In the next article we will work on increasing the average trade of our four systems.


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