Should We Trade in Both Directions?

July 25th, 2018

It’s an easy mistake to make.

I know. I’ve made it.

When developing a trading system, it’s only logical to think that we should trade in both directions. Markets clearly go up and down. Why would anyone forego delicious profit by only focusing on one direction?

Furthermore, rational thinking would dictate that a system isn’t robust if it only trades one way. If we only take long trades, for example, then we’re probably curve-fitting.

No, if we’re going to have a system that’s viable long-term, we need to be trading both sides of any market. And not only that, we need to have the same rules for both. Otherwise, once again, we’re just curve-fitting and asking for trouble.

Right?

Well…

A few weeks back, we looked at how basic, free indicators can beat the market. But in those examples, we only went Long.

Was that a mistake?

In a more recent post, we saw that RSI was the best indicator for trading the ES. It beat the market for the holding period we talked about and it beat the other indicators. But, again, it only went Long.

For that reason alone, it’s reasonable to conclude that we should throw that research out. If we want a truly trustworthy system, we need to go Long and Short.

I might have been trying to pull one over on you.

So here is what happens when we get more “robust”. I applied the same rules to the ES (60 day holding period, 1 contract, default RSI settings) and used the same rules (RSI goes up into Overbought, RSI closes down below Overbought, enter at open of the next day).

Here’s a picture of that entry:

https://www.screencast.com/t/3VYAmpuupx

So how did the Short trades work out?

From 1998-2018, we lost over $65,000. Report here: https://www.screencast.com/t/wQVr5sr6H6

Keep in mind that the exact same rules for Long trades beat the market easily: https://www.screencast.com/t/lNzFm6fl

Yikes.

Logic demands that we must trade both sides of the market and use the same rules to do so. The research tells us something else.

The Long side of the market and the Short side of the market are not the same.

And they need to be treated very differently.

But does this only apply to the ES? We’ll take a look at some other instruments in the YouTube video tomorrow.