A Countertrend System in a Massive Trend (Plus a Portfolio)

A Countertrend System in a Massive Trend (Plus a Portfolio)

May 10, 2024

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I wanted to give people a few extra days to some me some feedback on Monday’s Newsletter and many people did. Thanks for that!

So today is a fancy 2-for-1 issue. First up is a countertrend system.

If you read or watch videos about trading, you always run head-first into this argument when you’re thinking about a countertrend system.

Markets can trend longer than you can stay solvent. 

Meaning: if your system buys when RSI goes Oversold, you could get wiped out by several losing trades in a row as the instrument stays Oversold for a very long time.

It makes sense. But it isn’t necessarily true.

Take Cotton, for example. Have you heard about Cotton? The Cotton Futures contract (CC) has been on a run for the ages this year. It’s not AI or tech or crypto, but this simple commodity has put on a massive move this year.

What’s interesting is that Cotton isn’t a trending instrument. In fact, it’s a good countertrend instrument. Over its history, betting on a return to the mean is nicely profitable.

So how would a countertrend system do in a massive trend? Did it get wiped out like the experts warn us it would?

Nope. It’s profitable in 2024 as you can kind of see from the trades above. Yes, it took some losses in the trend. But it also caught the turn.

And what do you think will come next? More rocket ship trends? Or back to countertrend? Probably the latter. If so, then this system will go back to making decent profit.

Here are the quick details. This is one of our Bollinger Band™ systems but this one sells Short when price goes outside the upper band and closes back down inside. It does the opposite for Longs. The Long BB has a length of 20 and a st dev of 2.1. The Short BB has a length of 30 and has a st dev of -1.8. The target is $3500 and the stop of $2300.

And here’s the Curve from 1984-2024:

The takeaway? Countertrend can still work on a trending market.

The other thing to discuss is an update on my new favorite portfolio. This portfolio combines a simple system on SPXL (the S&P 500 ETF on steroids) and Gold (GC).

In our previous example, we combined SPXL with an evaluated system on GC. It turned out excellently.

Today we’ll look at a newer GC system that also uses the magical Bollinger Bands™. I talked about this in a recent video starting at the 23:58 mark. This link should take you to that spot: https://youtu.be/x11jKI8EmmY?si=KuAOHxJiyTMhBVSD&t=1439

For a quick review, the SPXL simply buys on the first possible day of the year and sells on the last possible day of the year. Could you just buy-and-hold it? Yes.

But I didn’t buy-and-hold it because it’s easier to test if we sell out each year and it’s also good to do it this way if a trader is taking money out each year.

Here’s what happens when we combine SPXL and the new GC strategy since 2008 on a sample $20k account:

It also has pretty nice numbers. And here’s the Curve:

It’s hypothetically up over 1,000% and has two very small losing years–much less than an index fund.

The takeaway? Combining stocks and Gold might be a very good idea.

More systems next week. Talk to you soon.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.