Automated Trading Strategy #79: Cycles & Trends
Using interconnected market cycles to your advantage.
Important: There is no guarantee that these strategies will have the same performance in the future. I use backtests to compare historical strategy performance. Backtests are based on historical data, not real-time data so the results shared are hypothetical, not real. Even with forward tests, there is no guarantee that performance will continue in the future. Trading futures is extremely risky. If you trade futures live, be prepared to lose your entire account. I recommend using these strategies in simulated trading until you/we find the holy grail of trade strategy.
The Turtle Trading System is a trend-following strategy that doubles down on sustained market momentum. Developed in the early 1980s by Richard Dennis and William Eckhardt, the system was part of an experiment. The goal of the experiment was to determine if trading was a skill that can be taught. They called the students "Turtles" after a turtle farm Eckhardt visited in Singapore.
The exact parameters used by the Turtles are detailed in "The Complete TurtleTrader: The Legend, the Lessons, the Results" (2007), but the overarching theme of the book is the need to have patience. Wait for the best time to trade so it’s easier to make a profit. Why go against the trend?
They found 14 traders by placing an ad in the Wall Street Journal and thousands applied. The criteria is unknown, but when you read the book it’s clear that the best traders were those that could bear the pain of waiting. Days and days of waiting for that signal—that’s trading.
Money is made by sitting, not trading.
-Jesse Livermore
If you haven’t heard of Jesse Livermore, it isn’t because of me. He was right 100 years ago, and he would be right today—the hard part about trading is waiting— but these days we can automate the ‘sitting’ function.
I trade on a simulated basis almost every day, but I only trade on a live basis when the odds are in my favor. And, in the same way that I use Ninjatrader because it allows me, someone with no coding skills, to automate the programming function, I use automated strategies as a way to automate the ‘sitting’ function. Part of that function is knowing when it’s time to stop sitting and start trading.
For Technical Traders, Timing Is Everything
Humans monitor cycles as a way to gain some sort of understanding about ourselves and the environment, but we’re also hoping to use the knowledge to gain a strategic advantage. For example, according to Zillow.com, a reliable source of information regarding real estate trends and cycles, the best time to sell a house is March if you're trying to sell quickly; July, if you’re trying to maximize profits. Knowing this, as long as you had the option, why would you start listing a home during any other month other than March? It also means that listing your house after Labor Day is asking for a longer holding period. Conversely, it also tells you when the best time to buy a house is. The general rule is not going to apply to all houses—I’m sure vacation spots have a different behavior—but if you’re building a real estate portfolio, these might be some data points to be mindful of.
Trading is no different. Technical traders use data to be strategic about trade decisions with regard to timing. So what have I learned about ATS strategies after following them for one year in a simulated live test?
some strategies are clearly better than others, but they all tend to ebb and flow. Which is to say, they have their own cycle that manifests as trends in performance. For example, Strategy 2 was doing great 6 months ago, but not so much today. It was a slow trend up and a slow trend down, as if the nature or structure of the market was changing and this was the “mudder” for that particular market, which brings me to my next observation;
the flow of performance for a strategy trends longer than market price and is therefore more predictable. Whatever fractal the market is cycling through lasts longer than short-term price trends, which makes them easier to track and take advantage of. Automated strategies or algorithms are a great way to track these fractal patterns.
there are a few strategies that appear to do well regardless of market direction, but most strategies are highly correlated with the market; when the market does better than average, ATS strategies outperform. Put another way, the portfolio has a positive bias when the market trends up.
Based on this information, the best time to run ATS strategies is when the general market is trending up. Like the Turtles, we’re looking for a breakout, or at least the potential for one, then we want to use a diversified set of strategies to take advantage of these cycles.
Note: I’m not saying you can’t be profitable by simply trading the best performing strategies at all times, but there are degrees of profitability. As I reviewed in the most recent Mudder Report, many strategies did well without any kind of cherry-picking with regard to timing, but I’m trying to increase the win rate and profit factor of the current live test, while reducing the drawdown. The best way to do that is to employ some of the same tools I would use in manual trading. One of those tools is the use of cycles to determine the best time to trade.
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.
Jesse Livermore
How Can We Use Strategy 79 For The Live Test?
One thing they drill into you at B-school (at least they did 25 years ago) is the difference between technical and fundamental analysis. Fundamental analysts tell you what to buy, while technical analysts tell you when.
I wasn’t going to publish another strategy this month—there was too much going on with the Live Test—but I kept getting the same question: How are you going to choose which strategies to run in the live test? Strategy 79 seeks to help answer that question. As you can guess by the nature of this post, the answer isn’t as much about which strategies to run as much as it is when.
So let’s talk about the ‘when’ of things.
Here’s a chart of NQ for 2023:
As you can see, price is clearly trending up. So that’s where we are coming into 2024. If the cycle/trend continues, we may go sideways, but it will likely continue up.
I am also very excited because markets tend to trend up during an election year. Ever since I found out about this “election year” cycle I’ve been looking forward to seeing if I could somehow integrate that into the cycles I already monitor in 2024. To read more about the election year cycle, click here. To read up on how well the election year strategy is performing so far, click here.
Naturally, it makes sense to start the ATS Live Test this year as well.
The hard part is figuring out the best months, weeks, days to trade on. In other words, if you have a portfolio that has a positive bias when the market is trending up, then you want to run those strategies in the best year, month, week, day of the year to support that bias.
While I generally only focus on intra-day strategies, the goal of this strategy isn’t to trade as much as it is to provide a window for best trade opportunities given what I’ve learned from the ATS forward test.
So getting back to that question: How are you going to choose which strategies to use? I’ll use Strategy 79 as a guide. I plan on using this strategy as a kind of calendar to help determine the best days to run the ‘mudders’. Right now, it’s looking like the time to start looking for the next window is February 5 - 8th. It’s also important to note that this overarching strategy does not take economic announcements or events into consideration. It also doesn’t take gaps, inter-day trends, support and resistance levels, etc into consideration. Some of these things must be handled manually, others are handled within the logic of the strategies.
I’ll talk more about how I’ll be selecting the best performing strategies for the current trend in the upcoming Mudder Report.
Strategy 79 Description, Command Structure & Download (C#): A Market Heartbeat
My mother-in-law delivered babies for over 40 years. When she saw my trading screens over the holidays, she was amazed at how much they resembled a baby’s vital signs, which is to say, there was a discernible rhythm. Here’s a chart showing my favorite indicator to capture that rhythm for the market.