Crazy and Somehow Very Profitable

Crazy and Somehow Very Profitable

May 15, 2023

“All magicians have a trick that even they don’t understand.”

 

That quote is from an episode of the one of the greatest old TV shows of all time.

(Of course, the greatest show of all time is always Sherlock.)

But the point of that quote is that sometimes things work and we’re not quite sure why they work. They use unseen forces or esoteric logic and lead to things that appear…magical.

And that’s what I felt when I accidentally stumbled across this old system in my attic (on my Tradestation).

I don’t know where it came from. I don’t know where its rules came from.

And I don’t know how it works.

What I do know is that it’s trying to use “seasonality” concepts. Meaning: allegedly certain stocks/indexes do certain things at certain times of the year. Like clockwork.

Maybe huge funds buy stocks at the beginning of a quarter and that moves indexes up. Or maybe funds sell at the end of a year to book losses for tax purposes. Or maybe companies tend to sell stock at the end of a fiscal year. Or maybe they buy them for the same reason.

Whatever the cause, there is a lot of research out there about stocks that move at specific times every year. Just like spring follows winter, stocks follow repeated behaviors.

That’s the reasoning anyway.

Is it true?

Let’s take a look at my crazy example.

First, we’ll use the ES futures contract. Could it work on SPY or something else? Maybe. I haven’t tested it yet.

Second, we’ll use a Daily chart.

Here are the seasonality rules:

  • In September of every year, we’re looking to go Short. No other month.
  • In September, on the 19th or the 20th, sell short at the Open of the next bar. Wait, what if the 19th and 20th come on a weekend? Then there’s no trade that year. Crazy.
  • For Longs, we’re only allowed to trade in June, October, or December.
  • And the Close has to be above the 2-period simple moving average.
  • And the Close also has to be above the previous close. In other words, it needs some short-term positive momentum.
  • In June, October, or December, on the 29th or the 30th, Buy at the Open of the next bar if short-term momentum rules are met.
  • Stoploss is $750 per contract.
  • Exit Short trades after a time exit of 14 bars.
  • Exit Long trades after a time exit of 6 bars.

Well, what do you think?

It’s just a bunch of mumbo jumbo, right? Why those days? Why those months? It doesn’t make sense.

But here’s the Equity Curve from 1997-2023:

Holy macaroni.

And here’s the Report:

The profit factor is through the roof. And the close-to-close drawdown is only about $3,000? With a hypothetical profit of $79k.

What the…?

I suppose it could be blind luck. And I did slightly optimize the days of the month from how I found the strategy originally. I optimized the time exits a little also.

But I didn’t touch the original code at all.

Could it be that seasonality on indexes is a real thing? A really profitable thing?

There’s one way to try to find out.

What if I put this system on another index? With no optimizing.

Surely this whole thing will crash and burn then.

We’ll find out in the upcoming Newsletters.

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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.