Hi guys, hi from Andrea Unger! Today, I’d like to talk about the end-of-month rally and, more in particular, I’d like to run some tests to see if it actually works and on which markets.
We know about the end-of-month rally, we have probably heard about that and we’ve heard about that on the US markets.
Well, so we go out there and test it.
Here we have the e-Mini S&P 500, which is representative of the stock market and, as an entry, we use the number of days before the end of a month as an input.
How many days before the end of the month shall we enter?
We close then, the first day of the following month.
So we run an optimization to see how many days are the best solution, and we go from 2, not 1 because we exit on day 1, and 22 which is the number of working days or trading days in one month.
We could use 23, but it doesn’t really matter in this case.
Here we have our results, let’s see a chart, here we are.
So we see gains, which is good, and we see a wide zone with good profits here.
Really good profits and also here some other winning scenarios with a shorter number of trades.
Here with 16 or 21 or 13 are those where we would feel more comfortable, but let’s have a deeper look inside, and here we go.
So 16 as said is the best result, we have now to analyze what the performance report looks like for these result and here we have a report, let’s see.
The equity line has some drawdowns, but it’s generally looking good starting from 98 when the e-Mini S&P 500 was born.
So everything looks fine and what might be a problem, is the number of days we sit in the market because we just enter and exit on the first day of the following month.
So 16 days in advance, means 15 days, here we measure only the days of full presence in the market, so when we close we don’t measure it, but okay let’s say 16 or 15 it doesn’t really matter, it’s a lot this is the matter, it’s a lot.
If you look at the average bars/trade for all the best results, we see big numbers, large numbers.
What is not bad is this one here, only 4 days in the market and the profit is not really bad, I would say it’s good.
It’s good and it’s not far from the best result, so I would definitely take this because 4 bars in the market is much better, is much lower risk than 15 or 20 or 12, simply because we keep our money in the market for a much shorter time, this is very simple to understand, the shorter the time we stay in the market the smaller the risk.
This is the equity line, the drawdowns are gone, I would say, I mean this is something we could see, there was $10,000 draw down here and we had about three times as much with the solution leading to the best overall results.
So I would definitely take this, this is certainly the best result and it also confirms the end-of-month rally, because we enter actually towards the end of the month.
The average trade is good as well, so everything looks good, but in spite of this, I’m still wondering if there is something we could improve.
This is the yearly result, what is astonishing maybe here, is that we lose money in ’98.
It’s astonishing because ’98 was one of those years in which whatever you did you made money.
Here this thing loses money, okay, nevermind because generally, especially now in 2019, things look very good.
What could we do actually?
Is there something we could do to improve it?
You have always to be curious to test so I would say yes!
I want to test something and in particular, let’s take the flag off here, okay in particular, I use the same entry but with an additional condition.
The additional condition is that I enter only if there has been a pullback, if the close before entering is below the midpoint of the monthly range, of the previous monthly range.
It’s a pullback, I enter only if there has been a pullback.
Obviously I could measure this pullback in different ratios, I put here the midpoint dividing by 2, but you could use any other value and you could test, but I just want to identify the concept here, so I take the midpoint, which identifies the causes of pullback and maybe there are much better values to take for our purposes.
This is what I do and I immediately test this idea, very well, we make more or less the same amount of money, I don’t remember exactly how much we did before, but here you see that the drawdown is now much better, the equity line is similar because the numbers were good as well already before, but this looks definitely good.
So I would say we are done, not completely, because I would also add a stop loss, just to protect against a market crash.
This stop-loss here, (this is the parameter Mystop) is based on the Average True Range on the last five bars before entry, so when we have the setup we take the Average True Range of the last five bars trading week, we multiply it by the input, this Bars Since Entry +1 takes the bars before the setup, believe me, don’t argue about the programming here, it’s what I’m telling you, and so we take, whether we have the signal to enter, the last average True Range, the last five bars, and we multiply it by 2.
By 2, actually literature normally uses this parametric stop multiplying by 3, but here we have such a short time in the market that it would not make real sense to take a multiplier of 3 in my opinion, so I take 2.
This is just a safety stop loss and we make the same amount of money, the drawdown is a bit worse, okay never mind, just a bit, but for sure this is the equity line, it looks good, for sure this is a safer solution.
Year after year it makes money, in ’98 became It a winner here now, which is good news, so we are also happy about this, but generally looking at the overall results we are more than happy with what we see here.
So we can state that the end-of-month really is true, it works, and it makes profits on the US stocks market.
Entering after a pullback leads to even better results, as we have just seen here.
We have tested this on the e-Mini S&P 500 future, we can obviously use also something as a Mid-cap for example.
What is it here? Okay, let’s see if it works on this one as well.
It makes profits which it is good, the equity line is good, not as good as the e-Mini S&P 500, probably there is more volatility here that weights a little bit the equity line.
Let’s see on the Dow 30 stocks, stock market directly, $50,000 pro trade on each stock, and let’s see what happens here.
These are obviously not a survivorship bias free, these are the stocks which we have today on the Dow 30, but it’s just a test.
We got good results and here it is the equity line, a very nice equity line, and here obviously we go back in history because stocks were there before the e-Mini S&P 500, it’s good to see that profits were there also before ’98.
So the end-of-month really does work on the American stock market.
This is very important, the American stock market.
Don’t ask me: “Does it work also on cotton future?” I don’t know.
Let’s test it on EuroFX, this is not the code, EuroFX a completely different market, it should not work, I mean maybe now we found incredible profits, I don’t think so, but let’s see.
It loses money, bad equity line.
The end-of-month rally is for the American stock market; it’s a bias on the American stock market.
If we test it, for example, this is very interesting, on let’s say the DAX future, European future, which is correlated for sure, but profits are shown and the equity line is worse.
I mean, I would not like to trade this personally.
So the American US stocks indexes or stocks, are the best for this.
The DAX stocks as we have seen for the DAX future, we can we test it as well, and I think we will find similar results to the DAX future, so let’s see.
It makes money, the drawdown is a bit high, you see this equity line is not nice, I mean, I don’t consider this nice.
So US stocks markets, this is where the end-of-month rally works, it does work, it has been working and still works.
Please write in the comments your experience about the end-of-month rally or other bias setups you might have traded.
This is an example of what has been told for years and that actually does work.
Ciao from Andrea Unger!