Using Intermarket Analysis to Trade DOW tracking ETF’s DIA and DOG.
Earlier we showed a system which traded the Dow index using the dollar index futures as the other market. In both tutorials we have used DIA, and ETF which has existed since 1998, that tracks the Dow on the long side. We also use DOG, which is an inverse ETF that started in 2006. The ETFs are different than the cash index so we reoptimized these systems separately. One important fact is that either long or short we are buying the ETF and use a buy command. If we want to go long, we buy DIA. If we want to go short we buy DOG. This article show the power of intermarket analysis to trade the index based ETF’s; DIA and DOG.
Our first system is as follows:
'For the DIA let Len1=8 and Len2=4
Sub DowETFSystem(Len1,Len2)
Dim TrMA As BarArray
Dim interMA As BarArray
TrMA=Average(Close,Len1,0)
interMA=Average(Close Of independent1,Len2,0)
If Close>TrMA And Close Of independent1>interMA Then
ExitLong("LX","LE",1,0,Market,Day)
End If
If Close<TrMA And Close Of independent1<interMA Then
Buy("LE",1,0,Market,Day)
End If
End Sub
Our second system is as follows:
'For the Dog Let Len1=8 and Len2=4
Sub DogETFSystem(Len1,Len2)
Dim TrMA As BarArray
Dim interMA As BarArray
TrMA=Average(Close,Len1,0)
interMA=Average(Close Of independent1,Len2,0)
If Close<TrMA And Close Of independent1>interMA Then
Buy("SE",1,0,Market,Day)
End If
If Close>TrMA And Close Of independent1<interMA Then
ExitLong("SX","SE",1,0,Market,Day)
End If
End Sub
Notice we have a buy where our normal logic rules would have said to short the Dow index. This is how you code ETF systems for inversely correlated markets.
Let’s now look at our results on the DIA. For this backtest, we deducted .01 slippage and commission.
Summary Report for Session ETFSys_DIA DIA.TXT 1/20/1998 to 1/16/2015. System is DOWETFSYSTEM(8, 4) Performance Summary: All Trades Total Net Profit $126.04 Open Position P/L ($3.00) GrossProfit $305.17 Gross Loss ($179.00) Sum Dividends $14.48 Profit no Dividend $111.56 Total # of trades 239 Percent Profitable 72 Number winning trades 172 Number Losing Trades 67 Largest winning trade $10.46 Largest Losing Trade ($12.00) Average winning trade $1.77 Average Losing Trade ($3.00) Ratio avg win/avg loss 0.6600 Avg Trade (win & loss) $0.53 Max consec. winners 14 Max consec. losers 4 Avg # bars in winners 7 Avg # bars in losers 14 Max intraday drawdown ($26.00) Buy And Hold $123.72 Profit Factor 1.7000 Max # contracts held 1 Account size required $26.09 Yearly return on account 28.4000
We can see that we make slightly more than buy and hold while having a lot less drawdown. Buy and hold had a drawdown of 55 points during 2007-2009. This strategy has less than half the drawdown.
Annual Breakdown Report ETFSys_DIA DIA.TXT 1/20/1998 to 1/16/2015. System is DOWETFSYSTEM(8, 4) Period Trades Winning Trades Win% Open Trade Net Profit Return % Running % 1998 14 10 71.4000 0 $2.90 4.6000 4.6000 1999 15 11 73.3000 0 $11.13 11.3000 15.9000 2000 16 7 43.8000 1 $7.20 10.2000 26.1000 2001 13 10 76.9000 0 $4.54 2.6000 28.7000 2002 14 7 50 1 ($11.00) -8.7000 20 2003 17 14 82.4000 0 $12.98 12.1000 32.1000 2004 14 9 64.3000 0 $2.01 2 34.1000 2005 14 11 78.6000 0 $0.13 0.3000 34.3000 2006 13 9 69.2000 0 $6.44 5.6000 39.9000 2007 15 11 73.3000 1 $3.58 -0.6000 39.4000 2008 18 15 83.3000 0 $24.84 32.6000 71.9000 2009 13 9 69.2000 0 $7.14 7.8000 79.7000 2010 14 11 78.6000 1 $17.35 17.4000 97.2000 2011 10 7 70 0 $1.73 1.6000 98.7000 2012 14 12 85.7000 1 $24.94 22.1000 120.8000 2013 9 6 66.7000 0 ($1.00) -2.7000 118.1000 2014 16 13 81.3000 0 $11.38 6.7000 124.8000 2015 0 0 0 1 ($3.00) -1.7000 123.1000 Total 239 172 $122.98
This shows that the large stocks in the DOW are inversely correlated to the dollar.
Let’s now look at the results for DOG, the inverse Dow stock ETF. This has a shorter history starting in 2006.
Summary Report for Session ETFSys_DOG DOG.TXT 6/21/2006 to 1/16/2015. System is DOGETFSYSTEM(8, 4) Performance Summary: All Trades Total Net Profit $21.28 Open Position P/L $0.00 GrossProfit $81.69 Gross Loss ($60.00) Sum Dividends $3.03 Profit no Dividend $18.25 Total # of trades 113 Percent Profitable 59.3000 Number winning trades 67 Number Losing Trades 46 Largest winning trade $10.23 Largest Losing Trade ($8.00) Average winning trade $1.22 Average Losing Trade ($1.00) Ratio avg win/avg loss 0.9300 Avg Trade (win & loss) $0.19 Max consec. winners 12 Max consec. losers 5 Avg # bars in winners 7 Avg # bars in losers 20 Max intraday drawdown ($22.00) Buy And Hold ($31.00) Profit Factor 1.3500 Max # contracts held 1 Account size required $22.06 Yearly return on account 11.3000
We can see that buy and hold was -31 for DOG, which is the inversely correlated Dow Jones Industrial Average ETF. This system makes over 20 points. This shows how the Dollar Index futures are predictive for the DOW.
Annual Breakdown Report ETFSys_DOG DOG.TXT 6/21/2006 to 1/16/2015. System is DOGETFSYSTEM(8, 4) Period Trades Winning Trades Win% Open Trade Net Profit Return % Running % 2006 4 0 0 1 ($3.00) -5.5000 -5.5000 2007 17 13 76.5000 1 $0.76 2.7000 -2.8000 2008 19 16 84.2000 1 $42.99 60.4000 57.6000 2009 12 6 50 1 ($10.00) -12.6000 45 2010 12 7 58.3000 1 $1.22 -3 42 2011 10 5 50 1 ($4.00) -9.5000 32.5000 2012 14 9 64.3000 0 $3.03 12.3000 44.8000 2013 10 2 20 1 ($8.00) -26.3000 18.4000 2014 15 9 60 1 ($1.00) -4.2000 14.2000 2015 0 0 0 0 $0.00 0 14.2000 Total 113 67 $21.28
This loses money in most years which are very bullish but it does well during bearish years so small losses during bullish years are not a big issue.
This system is not the holy grail, but it’s very simple and can be improved for example you can add a correlation filter to this system to improve performance.
The DOW is made up of big cap stocks, so you can see that using the simple concept of intermarket divergence can be used for trading DOW tracking ETF’s DIA and DOG using Intermarket Analysis
To learn more about using TradersStudio to trade stock and ETF systems, please visit our stock and ETF trading systems page.
DISCLAIMER
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. michael kors handtasche sale michael kors handtasche sale