The 5-Day Low And Low of The Range Trading Strategy in 2024 (S&P 500 Mean Reversion)

The 5-Day Low And Low of The Range Trading Strategy

Here is the strategy in plain English:

Trading Rules

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  1. IBS must be lower than 0.25.
  2. The close must be lower than the lowest low the previous 5 days.
  3. If those two simple criteria are met, go long at the close.
  4. The exit is at the close 5 days later.

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This is a very simple strategy. No fancy tools and hardly any calculations.

This is the result from January 1993 until today:

  • 517 trades,
  • 309 winners,
  • Average of 0.46% per trade.

This is way above the average return for any 5-day period which is 0.11% in the same period. The win ratio is 60% and the average winner is bigger than the average loser.

Here is a table including the profit factor between 2005 and 2013. (I was recommended to include the profit factor by one of the readers (although in my opinion, one can see that this strategy has high profit factor due to low max drawdown(?)):

  Avg per trade #trades #wins Profit factor Annualized %
1 day 0.45 143 88 2.19 7.28
2 days 0.36 127 77 1.65 5.42
3 days 0.73 120 81 2.39 9.54
4 days 0.7 106 68 1.99 8.26
5 days 0.98 102 68 2.48 10.76
7 days 1.11 96 63 2.26 11.28
10 days 1.26 82 56 2.2 11.06
20 days 0.85 57 36 1.57 5.7

As we can see its profitability climaxes at around 3-7 days. If exit at 5 days this strategy has 10.76% annualized return by just staying in the market for 510 days compared to 2826 days for buy and hold!

What happens if we turn it upside down and go short? Using 0.75 as criteria on today’s range gives a lot more fills compared to long. I need to increase it to 0.9 to get a similar number of fills. Over the same period, this has yielded almost 10%. It’s a lot harder to find good short strategies than long strategies.

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FAQ:

What are the results of implementing the 5-Day Low And Low of The Range Trading Strategy from January 2005 to October 2012?

During this period, the strategy resulted in 102 trades, with 68 of them being winners. The average return per fill was 0.98%, significantly outperforming the average return for any 5-day period, which was 0.11% during the same time.

– At what point does this strategy achieve its peak profitability, and how does it compare to buy and hold?

The strategy’s profitability is highest over 3-7 days. Exiting after 5 days can result in a 10.76% annualized return, outperforming buy and hold, which is held for a significantly longer period.

– Is the 5-Day Low And Low of The Range Trading Strategy adaptable for short selling, and what criteria are involved in shorting?

The strategy can be adapted for short selling by using a specific criterion on today’s range, such as 0.75, to identify short opportunities. Shorting can yield around 10% over the same period.