Simple Shorting Strategy

October 17, 2016 5:00 am9 commentsViews: 10290

Over the years I’ve looked at several very simple long strategies that were published in the book, “Short Term Trading Strategies That Work” by Larry Connors and Cesar Alvarez. Those articles include the following long strategies:

Buried within Connors and Alvarez’s book you will find one simple shorting strategy which can be used on the major market indices. In this article I will review this strategy and also combine it with the Double Shorting strategy we explored last week.

Simple Shorting Strategy

The rules of this system are very simple.
  • The instrument must be below its 200 day moving average.
  • If the instrument closes up for four or more days in a row, sell short at close.
  • Cover your position when price closes below a 5-day SMA at open of next bar.

The trading model is very simple and attempts to fade strong bullish moves when the overall market sentiment is bearish. By only taking trades when the market is below its 200-day SMA we are ensuring bears are in control. We then attempt to sell into short-term bullish strength as defined by four days of consecutive market advances.

Below is a screenshot showing example trades on the S&P Cash Index. Click the image for a larger view.

Larry Conner's short trades. Click to enlarge.

Larry Connors short trades. Click to enlarge.

Unless otherwise stated, all the tests performed in this article will be based on the following assumptions:
  • Starting account size of  $100,000.
  • Dates tested are from 2000 through September 31, 2016.
  • The number of shares traded will be based on volatility estimation and risking no more than $2,000 per trade.
  • Volatility is estimated with a five times 20-day ATR calculation. This is done to normalize the amount of risk per trade.
  • The P&L is not accumulated to the starting equity.
  • There are no deductions for commissions and slippage.
  • There are no stops.

Here is the position sizing formula used:

Shares = $2,000 per trade / 5 * ATR(20) * Big_Point_Value )

At first galance this is not very impressive. With only 27 trades since 200 we only generate 3.51% return on our capital. Of course the market bias is up (trading above the 200-day SMA), so most of the time this strategy is not actively looking for trades. But even when we are looking for trades during those bear markets, this method is not capturing enough profit to make it worth pursuing. This is a similar result I wrote about in this article, “The Death Cross – What You Need To Know.

While I don’t expect much change, let’s take a look at trading the ETF, SPY.

Not much change. What about the futures market? I’ll trade only one contract.

simple-shorting-emni-2016-10-13

simple-shorting-emini-results-2016-10-13

The largest losing trade on Emini was a $2,425 trade. The largest drawdown was $4,325.

Double Seven With Shorting

While we have determined that this shorting method is not that great, for fun let’s add it to Larry Connors’ long trading strategy we explored last week called Double Seven. I simply updated the TradeStation strategy code from the previous article to take trades during a bull and bear market. During a bull market the Double Seven strategy will be actively taking trades while during a bear market the Connors Simple Shorting strategy will be taking trades. Below are the results of combining these two strategies into a single system.

I’m trading the futures simple because it’s so easy to both short and go long with only one symbol. Since I’m trading futures, I removed the position sizing algorithm to normalize the number of contracts vs volatility. Instead, the strategy will simply buy one contract per trade. A deduction of $30 per round trip was deducted for slippage and commissions.

 

double-7-with-shorting-drawdown-2016-10-13

double-7-with-shorting-results-2016-10-13

The performance chart below compares the Long Only system with new combined Long/Short system.

Conclusion

The Double Seven Strategy with the shorting component does slightly improve the results of the long only Double Seven strategy. Combining these to strategies produce a trading model which changes how it trades based upon a long-term bull/bear market regime.

It’s interesting to note that the book these strategies were created with were was published in 2009. Thus, all the data after that year is out-of-sample data.

Is this system tradable with real money as is? Not yet! I think this has potential  but remember, there are no stops. With a little work on your part, you could trade something very similar to whats presented here. Also keep in mind profits are not reinvested during the tests performed above.  If you reinvest your profits while and/or increase your risk per trade, your returns will be greater.

Get The Book

Short Term Trading Strategies That Work

Downloads

Larry Connors Shorting Strategy (TradeStation ELD)
Larry Connors Shorting Strategy (Text file)
Double Seven Strategy With Shorting (TradeStation ELD)
Double Seven Strategy With Shorting (Text file)
Double Seven Strategy With Shorting WorkSpace (TradeStation TWS)

Jeff is the founder of System Trader Success – an inBox magazine dedicated to sharing great ideas and concepts from the world of automated trading systems. Read More Google

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9 Comments

  • BlueHorseshoe

    Hi Jeff,

    Aren’t you being a little dismissive of the performance of this strategy? I think the results here look very good. Where the issue arises is with the infrequency of trading (Van Tharp uses a portmanteau word ‘expectatunity’ to combine expectancy with the opportunity to exercise it). But if I recall correctly Connors is quite explicit about the need to trade the strategies he describes across a portfolio of ETFs, thereby increasing the number of trades and, hopefully, the return.

    An article in which you use the ETF portfolio testing software from the Ivy Portfolio piece to test Connor’s ideas across a group of markets would be very welcome indeed.

    Regards,

    BlueHorseshoe

    • Hello BlueHorseshoe. I have not been spending much time at Trader’s Laboratory lately. Hope all is well with you. I think you may be right. I would like to perform more portfolio testing on this strategy as well as other strategies I write about. The ETF Replay site will not work with this Shorting Strategy as the ability to program is very limited. You basically have a few pre-built methods to backtest. However, TradeStation does have this ability. It’s a relatively new feature and I just need to dedicate some time to learn it. But I think it will be well worth it.

  • Good work but equity curves with the trade number on the X-axis can be quite misleading as they do not reveal prolonged period of inactivity and identify those periods. It would be better to show the actual dates on the X-axis. For example in a 10 year period, all trades could be in the first year and nothing after that, just to mention an extreme case. Are you willing to trade the system no matter how good the results are?

    • This is a good point and one that I’ve brought up in other articles. When evaluating a trading system you need to be comfortable with the drawdown or sideways periods. The time between equity peaks needs to be examined. For some systems this time may be weeks, months or years! That’s why it’s important that everyone download the strategy, test it, completely understand it, and make their own decisions. For what is acceptable to one person, is unacceptable to another.

  • I wonder if there isn’t more work to be done in order to further decrease the possibility these results aren’t due to chance. The simple shorting strategy used four consecutive up closes, which is arbitrary. Shouldn’t you look at surrounding values like 2 (?), 3, 5, and 7? I would also think you should optimize the 200-day MA to check the surrounding neighborhood along with the length of the MA used to cover. The real complexity in my mind, then, comes in making sense of all three optimizations and figuring out which values are best (if any). This is the same sort of process you did in the Double 7’s article by varying the 7-day lookback.

    • Mark, there is always more work to be done! LOL. These are good ideas and would be appropriate for another article. Overall I have to balance the size of the article with the information I wish to convey. I try to keep articles around 1000 words since many people are busy. I wish to convey a single key idea per article so it can be quickly digested. Many of these articles are great springboards to inspire individuals to continue the research on their own. Again, you’re ideas are worth testing and I can easily dedicate another article to test these. Thanks!

  • Good article as always, Jeff!

  • Is this system on daily basis? (EOD Data).

    Best,
    Vince.

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