Trading Systems for ETFs and Stocks
The same strategies that we use for stock index futures can be applied to stocks and ETF’s. The main ETF that we like to test is the SPY. The SPY is the index correlation of the S&P 500 or S&P 500 futures. Below we have two basic strategies for the SPY that include the Gap Fill strategies from our book “Seven Trading Systems for the S&P Futures” and Cobra III-V.
Gap Fill Strategies for the SPY
The Gap Fill strategies from my book; Gap Fill I, Gap Fill II, and Gap Fill Combo work well on the SPY. Gap Fill I focuses on gap strategies that where there is a gap or price difference from the previous day’s close but within the previous days range while Gap Fill II focuses on gap strategies where there is a price difference above the previous day’s high or below the previous day’s low. Gap Fill Combo trades them both as neither strategy would both take a trade on the same day.
Cobra Strategies for the SPY
The Cobra strategies for the SPY are based on the same Cobra III-V trading systems for the stock index futures, E-mini S&P, E-mini Russell, and E-mini Midcap. Cobra III-V are the emerging market systems. New observations made early in 2010 over an extended period of time continued to show some new patterns that started with the new presidential administration taking office in the first quarter of 2009. The new patterns suggested a change towards a greater counter trending environment in the stock market. Fundamentally this could be based on more uncertainty or more apathy and lack of participation in general towards the stock market after the 2008 bear market.
The stock market tends to be more counter trend that most other markets such as commodity and forex markets. By nature many traders prefer to buy dips or sell rallies. Many trading systems require trend and range for profitability. It can be advantageous to add a counter trend trading system to a trading arsenal.
There are three Cobra strategies, Cobra III, Cobra IV, and Cobra V. There is also a “b” version of each. Cobra IIIb, Cobra IVb, and Cobra Vb. The “b” version adds a VIX filter. The VIX is the volatility index and is based on options trading and pricing. The VIX tends to move in an inverse direction from the stock market. All Cobra strategies are long only. The market can enter into long periods of low volatility trading. The Cobra’s have had the tendency in recent years to work in the low volatility counter trending market environment. Cobra Vb works well going back 10 years using the VIX filter. The Tradestation Performance Summaries are below.
Using these strategies are my favorite single system approach for the stock market going into 2011 and will continue to be my favorite approach unless there is a spike in volatility and a trend change to the downside.