Corona virus — buy fear trading strategy — 90% win rate
Fear, fear and more fear, every new website had spread upset news about corona virus and how it was expanding around the world.
As a trader, looking for opportunities ,and huge fan of one of top traders alive Larry Connors, I have decided to read again one of my favorite books “Buy the Fear, Sell the Greed: 7 Behavioral Quant Strategies for Traders”.
In his book, Larry Connors, talking about 7 common behavioral situations by our emotions as a humans that reflects directly in prices in the market.
“Edges in large markets exist because of human emotions, especially fear”
Some strategies were already mentioned in the past in other books by the same author, and still valid today, which proves that there is an edge especially when we are talking about fear and greed.
“The greater the fear, the greater the edges”
After read the book again, I woke up in monday morning and look the S&P500 graph and I could notice that a trader with more experience already took a position using one of strategies that Larry taught in his book called TPS — Time Price Scale-In.
In a nutshell, TPS system identifies when an ETF is extremely oversold or overbought and it then averages into the positions as it becomes more and more oversold or overbought.
There are thousands of variations of this strategy. In his book , he used the simple moving average as a filter and 2-period RSI below 25. In the book he showed backtest results of SPY since 1993–2017 using 2 different options of scale:
Testes — SPY
Increases position 10%, 20%, 30%, 40%
TPS 1–2–3–4
#Trades= 211
%win=94.79%
Avg days: 4
%Avg wins: 1.38%
%Avg loss: -1.97%
%Avg win/loss: 1.21%
TPS 2–3–5
Increases position: 20% , 30%, 50%
#Trades= 211
%win=91.47%
Avg days: 4
%Avg wins: 1.39%
%Avg loss: -1.46%
%Avg win/loss: 1.14%
Let’s identify if TPS trading system would be earned some money in a corona virus week using ETF SPY.
Using TPS — 1–2–3–4
2020–2–24–10%
2020–2–25- 20%
2020–2–27–30%
2020–2–28–40%
2020–3–2- close the position
Days in trade: 6
Profit: 2.10%
Using TPS — 2–3–5
2020–2–24–20%
2020–2–25- 30%
2020–2–27–50%
2020–3–2- close the position
Days in trade: 6
Profit: 0.6%
Being said, what we see above is , still there is a edge buying fear in the market, even if every news in the world is negative. However, if you want to be in the opposite side, you have to be aware what will be the risks and what is your risk management allows you.
In my next post, I will explore more some others strategies and test by myself in stocks and others ETFs.