Internal Bar Strength (IBS) Trading Strategy Applied to Consumer Staples (XLP)
The internal bar strength is defined as follows: (close-low)/(high-low). This indicator is very useful on mean revertive trading instruments, like for example XLP.
This article contains a simple but quite effective trading strategy using the internal bar strength indicator:
The internal bar strength trading strategy
(This article was first published in January 2018. Thus, 5 years out of sample, and the strategy has performed worse than in sample.)
In plain English, the strategy has the following trading rules:
Trading Rules
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- Yesterday’s IBS must be lower than 0.15.
- Today’s IBS must be lower than 0.4.
- RSI(5) today must be lower than 50.
- Entry on the close.
- Exit when today’s close is higher than yesterday’s high.
The strategy is tested on the ETF with the ticker code XLP, an ETF that tracks the major consumer staples.
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Here is the equity curve:
Annual returns:
Here are all the trade details:
When testing for optimization there is a clear pattern that it’s best with a low IBS yesterday and a bit higher today.
Of course, the annual return is pretty low, but that is because the strategy spends most of the time on the sidelines. The strategy is invested around 13% of the time (see “exposure” in the image above.
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FAQ:
– Why is the IBS indicator useful for trading mean-reverting instruments?
Insights into why the IBS indicator is particularly beneficial for trading mean-reverting assets, such as XLP.
– Which ETF does this trading strategy focus on?
Information about the specific ETF, XLP, that the trading strategy is tested on, and what it represents (consumer staples).
– Can you explain the conditions for entering a trade in this strategy?
A breakdown of the criteria that must be met for entering a trade, including IBS values and RSI(5) levels.