Testing the SOTM: The Aggressive Swing Trader
In this series, I’m looking at how different types of traders might make different use of the same State of the Market report. Our last post was about the sleepy trend follower. In this post we look at his bipolar cousin: the aggressive swing trader.
Unfamiliar with the free State of the Market? The SOTM is not one of our proprietary strategies. It’s a snapshot of what some of the simple indicators we’ve talked about on this blog are saying about the market right now.
Our aggressive swing trader is using all three predictions: the short, intermediate, and long-term.
She’s a bit hyperactive, so she’s basing 50% of her trade on the short-term prediction, 33% on the intermediate, and 17% on the long-term (I’m pulling the numbers out of the air, but there in a nice 3-2-1 pattern). Whatever that weighted-average comes out to each day, she’s going to allocate that same percentage at the close in her own portfolio.
I’m assuming that (like us) she’s trading S&P 500 2X leveraged mutual funds (our weapon of choice), so we can ignore transaction costs and slippage.
Numbers for the number lovers…
Our aggressive swing trader suffered significantly more volatility than our sleepy trend-follower and weathered two sizeable drawdowns, but was rewarded at the end of the day. Note that her performance flattened out in the second half of 2009 as a result of the breakdown in short-term mean-reversion we’ve chronicled ad infinitum.
But here’s the rub…
Like our proprietary strategies, the SOTM is a prediction from today’s close to the following close, but unlike our strategies, it’s not generated until shortly after the close (as the saying goes, you get what you pay for).
What’s our active trader to do?
Three options: (a) trade at the following open (or w/ intraday or aftermarket orders) – this would have cooled the results above, but still produced outsized returns, (b) calculate SOTM indicator results on her own before the close – we’ve previously described almost all of the indicators in detail, or (c) use the actual MarketSci strategies – all of our programs (particularly YK) are similar in spirit to the SOTM and generated prior to the close.
As I wrote in our last post, the point of this series is NOT to say “wow, look how great that backtest is”. The point is to demonstrate why we break the SOTM’s daily prediction down into three timeframes; there is no one-size-fits-all answer and the SOTM might mean different things to different investors.
Some traders (like us) are very focused on the short-term and only use intermediate and long-term indicators to setup our trading bias. Others just want to catch broader market trends and play more golf. We’ve designed the report to hopefully help all of them be a bit more successful.
. . . . .
Filed under: State of the Market Report, Trading Strategies | 10 Comments