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Trading the Dow Tracking ETF’s DIA and DOG

March 19, 2015 by

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

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