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I hate to say “reportedly”.

But in the internet world, unfortunately, we have to trust-but-verify.

First, I like this author. I’ve read all his books. I watch almost of his videos. I really believe he’s trying to help traders.

To a point.

While I fully realize that there are dangers to giving away secrets (KFC won’t tell you its herbs & spices, Coke won’t tell you its recipe, and Doyle Brunson lost millions giving his secrets away), I also struggle with the idea of giving away half of an idea.

Is doing that helpful?

(I’m not sure. But I give away the whole story with systems I discuss.)

Nonetheless, in this week’s Newsletters, we’re going to break down a system that reportedly turned $75,000 into $675,000 from 1997-2007.

Did it really do that? Will it work for us today? 

Let’s find out.

Here’s the premise of this system: indexes revert to the mean.

Is this true? Absolutely. So we’re on a good track.

To that end, we’re going to Buy when the index closes below a simple moving average (SMA).

Is this a good idea? Yes, it’s been tested for decades.

We’re also going to Sell Short when the index closes above the moving average. Symmetry is important.

Is this a good idea? Uh oh. Traders love to talk about the value of symmetry, and I get it. But the Short side of the market and the Long side of the market are not the same. I’m a little nervous about this rule.

Last, we don’t Buy or Sell right away on the open. We make sure price is going our way. To do this we only enter when price has moved a percentage of the average true range in our direction. For example, if the ATR is 100 points for the last three bars, we wait for price to move, say, 50% of that ATR before entering. Thus, after a close below the SMA, we wait for price to go up 50 points before entering. We do the opposite for Shorts. We wait for price to move down 50 points after the open before entering.

Is this a good idea? Yes. Waiting for momentum is a proven principle.

Pressing forward, we need to put some values on these ideas.

In the book, the SMA was set to 8 and the % of the ATR of the last 3 bars was 33%. We enter when price has moved 33% of the ATR in our direction.

And we’ll use indexes only. In the book, the ES (S&P E-Mini) was the best performer. I don’t know if it’s ES or ES.D, though. I’ll use ES.D because it tested out better.

Last, the author tested this from 1997-2016. This was past his big profit period but this is what was used.

What do we get?

Here’s the Equity Curve on the ES.D (Daily) trading 1 contract each time (both Long & Short) from 1997-2016 with trading costs built in:

Nice. It had some flat stretches but it’s easy to see how this could have hypothetically made 800%.

Are we good? Should we trade it today:

Here’s what’s happened out-of-sample (OOS) between 2017-2024:

Yikes. It’s deeply negative. You know why?

Short trades.

I hate to beat a dead horse, but the Long side of the market and Short side of the market are not the same.

By not adhering to that, this strategy became a monstrous loser.

So, is that it?

Not at all.

In the book the author warned that we’d need to make some “money management” adjustments to actually trade this in real life.

In the next Newsletter, we’ll do just that.