I have been working on various short trading strategies over the last few months given the environment but to this point have not entered a short position because I am yet to come up with a strategy that is statistically reliable. My aim with this post is to identify knowledge gaps/insight into what I have explored so far with the aim of developing a system generated strategy for shorting the market.
To date I have 2 system I trade;
1. A Long Bull Breakout system which has predominantly been switched off since Aug-07 (apart from some short mini bulls)
2. A long Bear system that has worked ok in the current bear market based on oversold and resistance points as targets.
Both systems make money, but the second to a lesser extent as expected. Cant seem to develop a system that reliably makes money shorting though (should have kept my systems 2 years ago that tested me bankrupt and just reversed to strategy).
Primarily I wish to be net long, but see a great benefit in hedging my long Bear strategy with a short bear strategy, thus the fundamental of my strategy is to go short when the market is bearish.
Benchmarked against XJO and tested against ASX200 Stocks.
Why ASX200 - specs have tanked deeper but are generally more volatile in an intraday capacity. Also Higher cap stocks are more accessible to short either on the ASX or CFDs.
What I have tested in system development of a Short Bear system
1. Trend of XJO have developed oscillators that detect a bearish trend reliably
2. Trend of underlying security Security Close must be < 200 day SMA and the trend oscillator is negative. ADX(14) must be > 20 otherwise stock is trading
3. Volume relationship of underlying Security look for up days of high volume that lead into low volume days at a similar price level (i.e. Identify the bear rally)
4. Entry Signal Entry price must be some derivative of the setup signal (i.e. >=C on signal or >= HHV of last X days (kind of a negative retracement).
5. Exit Signal mainly based on crosses above support levels for profit exits and crosses above resistance levels for trailing stops
Benchmarked annualised returns, what should I expect from a short system?
Win/Loss Ratio targets. What should I expect?
What would you suggest I look at next in terms of what I am testing?
What are the obvious gaps in the strategy I am testing?
Anything else you think is of use.
High Intraday volatility how to tackle stops and profit targets
Volume how to interpret and its relevance on the ASX
Index Trend anything to add to what I have above.
Trading environment Filter ideas to identify such (currently using ADX(14)>20)
Trend going against the short position (with potentially unlimited losses). How to determine whether a bear rally is a rally or a trend reversal.
Logical stop that does not get hit too often by intraday movements
Thanks in advance,