This post comes from Andrey S. of Russia (who was also responsible for the test of Monthly Seasonality in Latin America). Andrey is critiquing a trading strategy presented at another site (which shall remain nameless because I’m a nice guy).
The trading strategy calls for shorting the Dow 30 Index at the open if the opening price is below the previous close, otherwise buying at the open. The original strategy didn’t specify when the position was closed, so I’ve assumed positions are closed at the closing price.
Strategy results from 02/1998 frictionless:
(logarithmically-scaled)
Cha-ching! 69% annualized return – bring it on!
Oh wait, you can’t actually trade the opening price on the Dow 30 Index. Well I’m sure it will work as advertised on the ETF right?
Original strategy results (blue), applied to the DIA ETF (red), and applied to the index but trading the ETF (green):
(logarithmically-scaled)
Back to the drawing board.
This is a reminder of the importance of making sure what you’re studying and what you’re trading make sense together.
Opening prices on indices are notoriously inaccurate (I made a similar but not as blatant mistake myself in a long-ago post), and trading opportunities are often already traded out in the overnight market (which we saw for instance in my posts on East Asia vs US Stock Market Performance).
A giant thank you to Andrey for the post idea. As I’ve written many times before, I love reader feedback that contributes to this collective discussion.
Happy Trading,
ms
