In the short term, the longer a trend persists the more likely it is to end. We have shown this with quantitative testing and provided the results in our guidebook, High Probability Trading with Multiple Up & Down Days. In that book, we demonstrated that buying ETFs after extended losing streaks could be profitable. Back-testing shows that buying an ETF with 4, 5 or 6 multiple down days after an additional 5% pullback has been profitable more than 80% of the time, for example. In the back test, trades are closed when ConnorsRSI ends the day above 70. It’s also important to note that multiple down days are not the same as consecutive down days.
This strategy has also been profitable with other entries and exit rules. Test results for dozens of variations are shown in the guidebook. The reason for each variation is fully explained and by analyzing the rationale behind each variation and the test results, traders can find a strategy that meets their requirements. For example, more active traders may prefer a variation that trades frequently while less active traders might prefer a more conservative approach.
This strategy was able to successfully identify winning trades during the market selloff that occurred in early October. Among the trades the strategy identified was one in small cap stocks, one of the hardest hit sectors within the stock market. iShares Russell 2000 Growth (NYSE: IWO) met all of the requirements for one variation of the Multiple Down Days strategy at the close on Monday, October 13 when the ETF was trading at $121.79. The exit signal for that trade was given at the close on Thursday, October 16, when IWO was trading at $126.46. This three-day trade would have resulted in a gain of 3.83%.
Trading a mean reversion strategy can be profitable in a bull or bear market. Trading short-term strategies could be especially attractive in a bear market since traders will have less exposure to the stock market because trades last only a few days. The quantified strategies in High Probability Trading with Multiple Up & Down Days provide precise entry and exit rules so that traders will always know when they should get out of a position no matter what the market does.