Finale – A Trading Strategy!

Let’s end the course by showing how you can backtest an assumed trading strategy:

Ever so often you hear about something called the “Turnaround Tuesday” in the media. What is it?

The theory is that the stock market often “turns around” on a Tuesday.

Let’s backtest the following hypothesis:

1. Today is Monday.
2. The close must be at least 1% lower than Friday’s close.
3. If one and two are true, then enter at the close.
4. Exit at the close on Tuesday.

This simple trading strategy looks pretty good on the S&P 500 (the ETF with ticker code SPY):

The upper chart shows how you would have performed with 100 000 invested in 1993 and only traded the above strategy. The lower chart shows the drawdown along the way, which is a max of 11% in 2003.

Here are the “cold facts” about the strategy:

• Number of trades: 163
• Average gain per trade: 0.7%
• CAGR is 3.9%
• Exposure/time in the market: 2.25%
• Win ratio: 63%
• Average gain per winner: 1.75%
• Average loss per losing trade: -1.05%

Let this be the finale of the course and serve as an example of how you can approach trading.

Good luck trading!