More on the Double 7 Strategy
Strategy rules: go long the S&P 500 at today’s close if the S&P 500 will close both at a 7-day closing low and above its 200-day moving average. Hold the position until the S&P 500 closes at a 7-day high. Results from 1993:
Strategy results are in red, and for comparison, days when the strategy is out of the market are in grey.
Entries/exits are based on the S&P 500 price index, but strategy returns are adjusted for dividends. I’ve ignored return on cash and transaction costs/slippage.
Of course, you can’t trade the S&P 500 directly, but I’ve used it here for simplicity’s sake. Similar results would be had with the ETF SPY or other broad market indices.
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Both Trading Markets and System Trader Success began their respective tests with the launch of the ETF SPY in 1993, and clearly the Double 7 Strategy would have done an excellent job sidestepping the major bear markets over this particular 20 year period (no stats necessary – the graph speaks for itself).
But taking a longer view, we see that prior to 1993 the strategy was much less impressive. Same strategy, same assumptions, from 1970:
That doesn’t necessarily mean the strategy is a bust today as the market (and the effectiveness of indicators) clearly evolves over time.
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I’ll make a long story short (only because this strategy is a non-starter for me).
The strategy has done a good job reducing the impact of long protracted bear markets (ex. 2000-02). That’s partly the result of the 200-day moving average requirement (basic trend-following), but also partly because the strategy is only stepping in after recent weakness.
But it’s also done a poor job capturing enough of the market’s returns, particularly during protracted bull markets, which makes sense given that (again) it’s only stepping in after recent weakness.
I say Double 7 is a non-starter for me only because I think that there are more effective ways to play what I call “intermediate-term mean-reversion”, but as always, this is but one nerd’s opinion and I appreciate the opportunity to put the strategy through the paces.
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