Buy the Fear, Sell the Greed: 7 Behavioral Quant Strategies for Traders
Larry Connors has published a new book. And its a doozy. An excellent read.
The book contains 7 strategies that are built upon solid and easily understandable logic. I have programmed all of the strategies and will be publishing new reports of each strategy, on a weekly basis.
What I find extremely interesting about this book is that Larry is publishing a very unique strategy that is SHORT only. And its filter based that scans the entire stock market searching for a specific set of unique conditions. Top level stuff. Very unique.
The best trading book I have read in many years.
Thanks for reading today’s review of Larry Connors newest book: Buy The Fear, Sell The Greed
Over the past couple of years, I have written several articles regarding Larry Connors systematic trading strategies. I am a big fan of Larry Connors trading books. It’s not that Larry is a gifted writer. He certainly is no Hemingway. Those sorts of books are meant for entertainment. Larry is direct and to the point.
What I really like about Larry Connors is that he has the balls to write about trading strategies that can actually be programmed and backtested by the newbie, DIY programmer. He provides the statistics to back up his bluster. This is a rarity in the world of investment books. In fact, there is a cottage industry of absolute con artists proffering all sorts of investment nonsense.
Most trading books are filled with hot air. They usually begin with many pages dedicated to the inspiration provided by Aunt Mabel, the friendship of a neighbor, the loyalty of the family dog, and to the tireless efforts of a $5 graphic artist that designed the awesome book cover. They will then transition into the usual investment parables about cutting your losses short, letting the trend be your friend and a bunch of fluff about having a passionate attitude.
This crap pisses me off. I just want rules that are clearly defined. If the author say’s that you should be a buyer on Monday because the ‘magic spasm’ indicator flashed green, then he better provide the logic begin the ‘magic spasm’ indicator, and the statistics to back up the bluster.
Larry provides statistics. So let’s jump into this.
Buy The Fear, Sell The Greed: 7 Behavioral Quant Strategies for Traders
The book contains 7 specific strategies. Each strategy needed to be coded and individually tested. Since each strategy contains different logic and markets, we are going to be focusing on a single strategy for each blog post.
Each week I will be posting a new blog post that contains the next strategy, the markets tested, and the results from the test.
Also, I will be creating a separate and unique webpage where users can check back daily to see the results in real time, on a spreadsheet.
I know, plenty of readers are probably rolling their eyes and thinking to themselves “fucking lazy Emmett never keeps his word.” But I promise I will actually keep this up! If I don’t, then scream at me in the comments section.
Strategy 1: RSI PowerZones
The following is LONG only trading strategy used on the SPY, or S&P500 EFT. The strategy hold time averages between 3-5 trading days. The strategy contains a ‘cannonball’ method that adds a second unit, or double position if the condition persists.
Here are the rules for the RSI Power Zones:
- SPY is trading above its 200-day simple moving average. This tells us we’re in a longer-term trend.
- The 4-period RSI of SPY closes under 30. Buy SPY on the close.
- Buy a second unit if the 4-period RSI closes below 25 at any time while the position is open.
- Sell when the 4-period RSI closes above 55.
The following results represent a standard investment size of $2000 per trade. So if the SPY is $200 per share, then the position size would be 10 shares. The test period is from 1989 to August 2018.
In my opinion, what is really impressive about this strategy is the Profit Factor of 5.35. Let’s have a look at the equity curve…
The blue line is a 100-period moving average of the equity curve. Why include this? For me, if the equity curve of a trading strategy breaks that average, then it’s broken. Turn the strategy off.
The flat periods that occurred during the bear market of 2000 and 2008 signify that the strategy worked well at “shutting itself down.”
How I recommend trading this…
In my opinion, this is an excellent method for passive investing. The strategy usually kicks out 1-2 trades each month and the entry is stupid simple–enter the market on the close.
Another thing I like is that it shuts down once the market enters bear mode–no trades when closing prices are below the 200-day moving average.
Once again, I promise to get a page up so that readers can check daily for any signals. Give me a few days to complete, my wife has me working on a long-promised project of painting the garage.
How to be AGGRESSIVE with this strategy…
There are SO MANY WAYS to expand upon this strategy. I really didn’t want to open this can of worms, but I will give you another angle to consider.
- Expand your list of tradable ETF’s that cover different sectors and global economies.
- Only take trades after a crash. In other words, adjust your RSI settings from 30 and 25 to a much lower setting of 20 and 10.
Let’s take a look at our Global list of tradeable ETF’s, with “crash” settings of 20 and 10:
|Symbol||Linked to Complete Description||Quick Description|
|DIA||Diamonds Trust||The Dow Jones Industrial AverageSM (DJIA) is composed of 30 “blue-chip” U.S. stocks.|
|EEM||iShares Emerging Markets||Exposure to large and mid-sized companies in emerging markets.|
|EFA||iShares MSCI EAFE||Exposure to a broad range of companies in Europe, Australia, Asia, and the Far East.|
|EWH||iShares Hong Kong||Exposure to large and mid-sized companies in Hong Kong.|
|EWJ||iShares Japan||Exposure to large and mid-sized companies in Japan.|
|EWT||iShares Taiwan||Exposure to large and mid-sized companies in Taiwan.|
|EWZ||iShares Brazil||Exposure to large and mid-sized companies in Brazil.|
|FXI||iShares China||Exposure to large and mid-sized companies in China.|
|GLD||SPDR Gold Shares||The first US traded gold ETF and the first US-listed ETF backed by a physical asset.|
|ILF||iShares Latin America||Exposure to large, established companies in Latin America.|
|IWM||iShares Russell 2000||Exposure to small public U.S. companies.|
|IYR||iShares Dow US Real Estate||Exposure to U.S. real estate companies and REITs, which invest in real estate directly and trade like stocks.|
|QQQ||PowerShares NASDAQ 100||Exposure to largest non-financial stocks on Nasdaq.|
|SPY||SPDR SP500||The S&P 500 Index is a diversifed large cap U.S. index that holds companies across all eleven GICS sectors.|
|XHB||SPDR SP500 Home Builders||Exposure to home building products and producers.|
|XLB||SPDR Materials||Exposure to materials producers: chemical, construction, packaging, mining, paper, etc.|
|XLE||SPDR Energy Sector||Exposure to the energy sector of the SP500.|
|XLF||SPDR Financial Sector||Exposure to insurance, banks, thrifts, RE trusts, mortgage finance, consumer finance of SP500.|
|XLI||SPDR Industrial||Exposure to defense, aerospace, marine, machinery, airlines and air freight.|
|XLV||SPDR Health Care||Exposure to pharmaceuticals, health care equipment, health care related produces and services.|
Wrapping things up
Well, that’s it for today. Next weeks blog post will be really interesting. It will be titled “CRASH.”
And it’s not a long-only trading strategy that uses Larry’s well worn RSI method. Instead, we are going to explore a method that targets individual stocks and uses an indicator that I never knew existed. It’s really fucking interesting and when I programmed it…I just scratched my head and wondered where in hell have you been hiding!
The best part of this strategy is that it is SHORT ONLY for individual stocks.
Short only, stock trading strategies are as rare as a leprechaun riding a unicorn. So tune in, it’s going to be a fun blog post.
Need to buy this book right now?
The following link will take you to straight to Amazon. Oh, and I must disclose, if you purchase this book, I will earn a whopping 14 cents. LOL.
Thanks for reading. See you next week.