This brief article is a supplement to “Turn around Tuesday – Will it continue to be a profitable S&P 500 trading pattern?” If you have not read this article yet, you might want to do so before continuing.
Here is the basic pattern we just evaluated:
- Monday closes in the bottom 20% of the three day range
- On Tuesday, buy on the open
- Sell on the close of Wednesday
Lets add a new element: Rather than buying on the open, we will look at buying with a limit order below the open, and at buying on an intraday breakout above the open. In each case we will be looking at values between 4 and 20 points. Here is the data table:
What we see is that there are a number of combinations (Buying a larger dip or larger intraday breakout) that increase average return. However, because the number of trades is less compared to simply buying on the open, the total profitability is less. This is one of the most common trade-offs in strategy development. In practice it can often be better to trade an idea with a lower expected value in order to get more trades.
I often get questions on strategy development and risk control. If this interests you, check out these two articles. Here at NAS Trading, we are in the process of moving towards a subscription-based model which is where we will exclusively share our best, most actionable ideas. If you would like to stay updated on progress, make sure to sign up for our mailing list.
P.S. If you made it this far, the December 2012 issue of Active Trader Magazine (At newsstands now), contains an article by me that you might find interesting titled, “The low close edge”. The February 2013 issue (At newsstands early January 2013) of Active Trader Magazine will also feature an article by me that builds on some of the ideas in this article in a significant way. If this stuff interests you, make sure to pick up a copy.