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.

[logarithmically-scaled, growth of $10,000]

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.

Last Thoughts

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.

Happy Trading,

. . . . .

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10 Responses to “Testing the SOTM: The Aggressive Swing Trader”

  1. 1 Darren

    Thanks for posting this, Mike. This is my first time commenting, but I’ve been following your blog for a while and found your posts to be quite helpful.

    I think the distinction you’ve recognized between different kinds of traders is important. There’s one type that describes a large group of investors: dollar-cost-averagers. They differ from sleepy trend followers in that they want to regularly add to their positions, but adding without using any filters lowers returns and increases volatility.

    It seems that the ideal replacement for dollar cost averaging would be use multiple filters:

    1. Buy only when the 50-day sma is above the 200-day sma.
    2. Buy at dips (swing bottoms) using an intermediate-term indicator.
    3. Sell the entire position when the 50-day sma crosses below the 200-day sma.

    Do you know of anyone who’s looked into this kind of strategy? Thanks if you can help.

    • 2 MarketSci

      RE to Darren: interesting idea for analysis. I don’t know anyone specifically who’s looked at that, but I’ve added it to my todo list to run some numbers for. michael

  2. 3 Jon Tresslar

    Hi Michael,

    Like Darren, This is my first comment although I have been following you for months and I think you have an excellent site. Just to make sure I understand your recent post; isn’t it true, for example, that when the short term indicators are down and the intermediate and long are up, when you diversify your investment dollars proportionately to the respective indicators you may be going both long and short at the same time and effectively cancelling yourself out?

    • 4 MarketSci

      RE to Jon: pleased to make your acquaintance sir.

      If the trader were trading each of the timeframes in separate accounts, then yes, they would cancel. But that would be a pretty inefficient way to go about things (because despite beta being cancelled out, all accts would still incur the annual fund expense ratio).

      For this test, I’m assuming that she actually calculated the final % (after the 50/33/17% split) and then just traded that final number in one account. So taking todays’ SOTM values for instance (49/9/59%), she would just be long a 37.5% 2x S&P 500 fund at Friday’s close [(49%*50%)+(9%*33%)+(59%*17%)].


  3. 5 Darren

    I like the aggressive swing trader concept because it has the trader investing the most money when the indicators at all three time frames give “buy” signals. It automatically scales the trader’s position in case the swing bottom doesn’t materialize where he thought it would.

    It seems that another approach to diversifying would be to wait for a high-probability swing bottom before buying and watch lots of stocks so the trader isn’t sitting in cash waiting for the bottom to form.

  4. 6 Bgpl

    hi Michael,
    only slightly related question: on the topic of calculating the closing price before the close..
    Background: for MOC orders, the order needs to be put in 20min before close (leaving aside the situation of imbalances in order book etc.,).
    In the above situation, do you know the effect of extrapolating the current price at say 3.38 pm to the closing price ? how do strategies which do MOC orders in practice (but in theory are backtested using closing price) work ?
    I know you are using Rydex so that probably doesnt apply to you.
    thanks !

    • 7 MarketSci

      RE to bgpl: correct, not an issue w/ Rydex/ProFunds MFs, but definitely an issue for intraday vehicles. I haven’t specifically modelled the 20min cutoff, but I would bet a dollar to a dime that it would negatively impact results (either by calling the close really wrong, or sitting on the sidelines on questionable days).

      Have you had any experience executing w/ LOC instead of MOC orders?


  5. 8 bgpl

    hi Michael,
    thanks for your thoughts.. i have tried executing using LOC, and so far, i find that there are a few occasions where i could have had better fills i.e., the market closed differently than my executed limit -> thus missed a few pennies (the other way has not occurred usually and i have never got better fills than my limit price). I have also played with market orders close to Closing time (1 min before), but i generally dont like market orders due to the slippage and lack of control, and the (not insignificant) divergence from my backtesting.
    Again, not a huge amount of experience but maybe around a 100 trades.
    The bigger issue i am struggling is how to quantify these better in backtests other than have a simple slippage friction..
    Would love to hear the experienced voices out there who backtest on Closing prices.
    thanks again,

    • 9 MarketSci

      RE to bgpl: this is something of special interest to me at the moment. I’m considering starting to trade a strategy using some very specific ETFs at the close (because a comparable lev. MF doesn’t exist). To meet my “quality of life” requirement it would have to be fire-and-forget, so I’m going to test some different ways to accomplish that (i.e. reinvent your wheel). Unfortunately, nothing to share on the topic at the moment. michael

  6. 10 bgpl

    hi Michael,
    exactly my requirements on quality of life. i do not want to be having to follow the markets tick-to-tick. But i find that with a some of my brokers, i can automate the trading so even though its more work, at least its the machine and not me doing it..
    but, i would like to have a good way to do this across brokers which dont provide APIs as i have those also.
    please let me know if you find something of interest here, and vice-versa, of course.
    I note that woodshedder’s blog now has something going on here, though it is about Opening cross, and also some earlier post from Tito@puppetmastertrading had some material on this as well.
    Thanks !

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