Learning to Trade 105

This continues the discussion of improving the recent return of a system that alternately invests in QLD and QID, depending on the direction of the new 52-week highs minus the new 52-week lows. Performance using the New York Stock Exchange (NYSE) vs NASDAQ was in question, since NYSE was down over 13% since January, 2009.

Using the NASDAQ new highs - new lows definitely improves performance this year. Instead of being down almost 14%, performance shows a 10% gain. This makes sense since the NASDAQ is leading out of the bottom March 6th, the NASDAQ contains tech stocks, a leading sector, and the NASDAQ contains smaller cap stocks which generally lead a new bull markets. It also makes sense from a seeming logical standpoint that QLD and QID are Exchange Traded Funds (ETFs) representing the 100 largest cap stocks of NASDAQ.

If one backtests the system back to July 2006, using the NASDAQ highs-lows, returns indicate 305%. July 2006 approximates the creation and start of trading for the two ETFs, which points toward a weakness of this system.

Normally when testing a mechanical trading system, one divides the data into at least two segments, usually representing all market phases, bull, bear and transitions. One tweaks the system on one data set to gain maximum performance, then tests it against the other data set to determine if the performance continues. If it does, one most probably has a good system; if not, one has merely over-conditioned the system to the initial data set, and it probably not perform well in reality. Better to find this out without paying real money for the results. The problem with QLD-QID system is that ETFs have not existed over sufficient time to have two all-market-phases data sets. It is just completing the first with this transition from a bear-to-bull market.

Although the recent recent of the NASDAQ-based system improves over the NYSE, performance since onset in July 2006 does not. The NASDAQ system performs at 305% compared to the NYSE version's 368%, showing why the NYSE system was used.

We still desire an altered system to improve system performance in recent months while maintaining or improving long-term. However, do keep in mind that either system version is performing at enviable rate, especially considering 2008 had many peoples IRAs and 401Ks down 50%.