Monday, April 09, 2012

Building A Trading System Inspired by Blog Posts

Our friend and favorite Internet Entrepreneur Howard Lindzon wrote a great post on his blog, Momentum Friday…Fashology, Mobile Payments and Biotech. The post was great because it's short and sweet and gives the reader some really good names to watch in four industry groups. I want to expand on Howard's post and show you how you can take a trading blogger's good research and quickly turn it into a powerful trading system using our New and Improved OddsMaker 2.0.

Creating the Strategy

Let's start with the stocks from Howard's post: $LULU, $NKE, $IBB, $UA, $DDD, $AAPL, $INTU, $EBAY, $V, $MA, $PAY, $ARBA, $MANH, $TIBX, $AZPN, and $CSOD.

First, I created a new Symbol List and added the names above.

Then I asked myself, "what is a good entry signal?" In this case I used a common entry point that many people will be able to understand, the 20 day SMA Cross. I decided to buy the stocks Howard mentioned in his list any time they crossed the 20 day SMA. The picture below shows what it looks like on our software when those events happen.

20 day SMA Cross alert window

Setting up the Backtest

In this backtest, we are looking back at 30 days of market data. The OddsMaker strategy building tool makes some simple assumptions to help create a reasonable strategy. The rules are we enter a position the first time our software sees the symbol appear and do not trade that same symbol again that day.

We selected our entry signals and stocks, so it was time to see if Howard did his homework :-). To test the stocks we applied the following conditions: We started looking for entry signals one hour after the open and then bought the 20 day SMA Cross the first time it appeared. We tested a hold time of 10 days assuming a swing trading methodology. We also applied a simple 2 point stop loss with volatility multiple to make sure that we didn't accidentally sit in a trade that just started to turn against our assumptions. Below is the screen where I set my parameters.

OddsMaker backtest setup window

Examining the Results

The results are pretty promising as you can see from the screen below. There were a total of 24 trades over the course of the 30 days. Howard and his team at StockTwits did a good enough job researching the names to give you a group of stocks that yield a success rate of 79.2% for the strategy over the course of 30 days. The projected annual % rate return is 80%. Strategies are never perfect and this one started out a bit negative, but then really got going.

OddsMaker Strategy results summary

The OddsMaker is a powerful event-driven backtesting tool that allows for the trader to refine trading systems based on any filtering criteria. From the new OddsMaker 2.0 Optimize tab, you will be able to see which market parameters are having the most impact on the strategy, adjust your strategy accordingly, and test again using changes to the system.

To get Trade-Ideas Pro and use the OddsMaker to optimize your trading, visit our Create Account page and sign up.

1 comment:

Options Trading said...

Thanks for informing us about this trading system strategy. You explained everything clearly.