How to Achieve a 96% Win Rate

Aug 29, 2008: 10:17 AM CST

Would you like a simple, easy to implement trading strategy that has recently returned a 96% win rate, and it doesn’t require indicators at all – in fact, it doesn’t even require watching the market intraday or watching any news reports.  Sounds too good to be true?  Of course, but recent research and a simple strategy test by Rob Hanna of Quantifiable Edges has found such a system.  What is it?

Hanna’s post “A Short System for Handling Chop” details a two-part entry system that has returned this impressive result from a trading system tested with TradeStation that has the following strategy:

1.  The S&P 500 closes higher two days in a row
2.  And the S&P 500 is beneath its 200 day SMA

Then Sell Short on close.

The exit criteria are the following:

1) If the S&P 500 closes under the entry price of the trade, cover on close OR
2) Cover on the close four days later if there’s no profit (time stop/exit).

Hanna coded and tested this strategy from June 1st 2007 to present.

Check out his entire post for the full results and charts, but Hanna found the following:

“There have been 26 trades, 25 (96%) of which were profitable. The average trade made about 0.75%.”

Rob also took away the “closing beneath the 200 day SMA” component and found the following:

“If you relax the entry criteria and don’t require the S&P to close below the 200ma, then there will be 43 trades – 41 (95%) of which were profitable.”

Does this all sound too good to be true?  Well the data speak volumes during the current environment, but realistically, is this a profitable system now or forever?  In other words, can you start trading this system tomorrow?  Rob writes:

“Although the performance has been stellar over the last 15 months, this is not a great system. In fact, if you run performance back to 1960, it’s not even a winning system.”

Also, “Lastly, this environment will certainly change. While the above system may not be a great “trading” system, it does appear to be a very useful “tracking” system.”

Read Rob’s conclusion and insights into what the system means.

To add some confirmation with current action, the S&P showed strength yesterday… but now (as of this writing), almost all those gains from yesterday’s session have been erased, and we experienced a down gap this morning – thus the profitable ‘trade’ would have been to enter short at yesterday’s close.  I cynically had a conversation with a trader yesterday saying just that (prior to reading Rob’s research).  I noted “with the strength of today, I bet tomorrow will be a big down day.”  That’s just the current environment we’re in.

Either you get frustrated, stand aside, or try to profit from it.  Rob’s right – these conditions won’t last forever, but for now, let’s try to understand what’s going on and how (and whether) to participate profitably.

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