Down Days Trading Model

About the Author Jeff Swanson

Jeff is the founder of System Trader Success - a website and mission to empowering the retail trader with the proper knowledge and tools to become a profitable trader the world of quantitative/automated trading.

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  • BlueHorseshoe says:

    Hi Jeff,

    Along with the RSI and VIX, I’m pretty sure Connor also discusses 3 day pullbacks for entries.

    The majority of the time these two entry methods will produce identical signals, so it might be interesting to see what would happen if you ignore all entries signaled by both methodologies and compare those that are only signaled by one approach or the other.

    I believe that there are good reasons to expect the RSI to be superior in performance. ‘Two down days’ is too simplistic in that it tells you nothing about the degree to which price declined relative to recent volatility.

    • Hello Blue. Yes, Connor does have a couple price-based setups. One of them is the Simple Shorting Strategy ( where four consecutive up-days during a bear market generates a sell signal. Interesting idea about separating the unique signs only. I will keep that in mind if I create a follow-up. The RSI signal does contain different information from the simple price-based signal. I guess the simplicity of the price action based signals could also be seen as a strength. Thanks for writing!

  • Michael says:

    Another good article on an entry technique. I would like to see an article based on a random entry and explore direct exit techniques such as nth profitable close or nth unprofitable close. Earik Beann has a chapter in his book Mechanical Trading Systems about random entries and exit strategies. Would love to see an article applying this to an EasyLanguage program.

    • A very good idea Michael. I’ll add that to a list of items to test when I do a follow-up article. Thanks!

  • Hello Jeff. This is excellent analysis! I like your posts because they are to the point and your coding is clean. Actually, I have a general indicator that measures winning and losing streaks that is an integral part of my analysis along with my version of RSI and of course Wilder’s RSI and Cutler’s RSI.

    Here is more info on the Gambler’s Fallacy Indicator:

    and on the Harris’ RSI

  • Wilko says:

    I am a regular reader of your blogposts as well as a subscriber, thanks for providing all your work free of charge. Hope you keep ’em coming!

    I feel compelled to comment on your article as it touches on some of my own work:
    As a system developer, I am struggling with filtering out the bias in system creation that the longest bull streak recorded in history risks creating. I’m talking about the (exceptional) bull market since early 90s. Your system in the article is affected by this bias. Try running the strategy starting sometime late 70s and you’ll end up in ruin.

    Intuitively, these types of systems (I guess) are a way to bet on tail risks. not occurring. A type of “writing options” strategy, where you exchange a regular stream of small income for the risk of one (or more) huge negative outcome. One would basically be betting that we’ll not be hit by a October 1987-event (BlackMonday). As long as we are out before such an event, we should be fine. However, as can be seen by running the system on data from the 70’s, the regime can change and we’d be wiped. Are we heading into a stagflationary environment in the near future? Only future will tell. My take is that this type of system is a bet on that not occuring near-term and current regime (lower inflation => lower discoount factors) to continue

    • Thanks for writing and for the kind words Wilko. You raise good points but the mindset I have is this: I can’t trade the 1970’s market. Also, the electronic futures market is a different animal than the futures market of back then. In short, it’s not relevant. There are plenty of strategies that worked in the past that don’t work today. Market characteristics change over time yet, some of the characteristics work for decades before fading. You’re correct about the upside bias and this strategy takes advantage of it. In short, I guess I’m not worried about the upside bias and will continue to trade it until it stops working. I would recommend a portfolio approach to all trading thus, reducing the impact of a dramatic change in market characteristics.

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