Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

jswanson

Improving The Double Seven Strategy

Recommended Posts

In this article I want to take a look at a reader's recommendation on improving the Double Seven strategy. If you recall, the Double Seven strategy is a long-only strategy for the the broad U.S. indexes. It was created by Larry Connors and was covered in a previous article, "Double Seven Strategy". Recently a reader pointed out a possible improvement to the system which appeared in the "Letters to the Editor" section of Stocks & Commodities Magazine, V. 27:3 (8-9). In short, the recommendation modified the entry and exit signals in an attempt to capture more profit. Changes included the following: Market entry would become a buy stop entry and the exit would become a trailing stop. To be honest, I found the description of the changes not 100% clear and my testing was not promising. However, the concept of a buy stop and trailing stop are worth looking into. First, let's provide a quick review of the Double Seven strategy.

 

The Original Rules

 

As a reminder, here are the original rules for taking long trades which are executed on a daily chart:

  • The instrument must be above its 200 day moving average
  • If the instrument closes at a seven-day low then buy at market
  • If a long position is open and the instrument closes at a seven-day high then sell at market

 

 

Testing Environment

I coded the above rules in EasyLanguage and tested it on the S&P cash market going back to 1983. Before getting into the details of the results let me say this: all the tests within this article are going to use the following assumptions:

  • Starting account size of $100,000.
  • Dates tested are from 1983 through June 30, 2014.
  • The number of shares traded will be based on volatility estimation and risking no more than $2,000 per trade.
  • Volatility is estimated with a five times 10-day ATR calculation. This is done to normalize the amount of risk per trade.
  • The P&L is not accumulated to the starting equity.
  • There are no deductions for commissions and slippage.
  • There are no stops.

Please note we are not adding our profits to our trading account! We are always trading a small percentage of our starting capital. Thus, the results demonstrated here are very conservative and it would be easy to generate much higher returns. Here is the position sizing formula used:Shares = $2,000 per trade / 5 * ATR(10)For an example of what the trades will look like on a daily chart, below is an image of a couple of trades. As the market makes a seven-day low, a long trade is entered. Open trades are then closed at the next seven-day high.

 

Double_7_Chart_Example_Trades.png

 

Double Seven Results

 

Based upon the standard rules we get the following results trading the S&P cash market.

Double-7-Results.png

Double_7_EQ_Curve.png

 

Modification of Entry Signal

 

The recommendation within Stocks & Commodities Magazine recommended..."Set a sell-stop 0.1 below the close of the seven-day high, and keep moving it below the close each day until you are sold out." I modified this a bit. In essence, we have a classic trailing stop and it makes a lot of sense given we are attempting to capture as much profit as possible when the market recovers from a pull-back in an overall bullish regime. Presumably during a strong market we can expect price to occasionally go beyond our traditional seven-day high exit. A trailing stop may very well capture more profit. Of course some of the trades will "give back" some of the profit as price must fall to hit our seven-day stop, but the handful of runners should provide us with more P&L to offset these setbacks. The only way to really see if this will work is to test it. For my test I used the seven-day low instead of the close. Below are the results with our new modified seven-day low trailing exit.

 

Double-7-Trailing-Stop.png

Double_7_Extended_Exit_EQ_Curve.png

 

We can see we make slightly more net profit but it comes at a price. Our profit factor falls as does the percentage of winning trades. We decrease our consecutive winners while increasing the number of consecutive losing trades. We do have a slightly larger average profit per trade, but we obtain this with less efficiency as seen by our profit factor. Viewing the equity curve you can clearly see the choppiness of this system. Sure it makes more money, but it's not a clean looking equity curve when compared to our standard Double Seven Strategy. Why would this be? By introducing our trailing stop we are causing a number of trades to get stopped out that ultimately turn in our favor. This leads to more trades when compared to the original rules as well. Recall the original rules have no hard stop - only dynamic exit at a new seven-day high. By adding our trailing stop we immediately place a hard stop at the low of the past seven-days. Introducing this stop 'hurts' our system. Can we try something else? Maybe what we can try is only introducing the trailing stop when...

 

1) a new seven-day occurs; and

2) we have positive P&L.This will delay adding the trailing stop.

 

Price will be free to meander or make new lows instead of taking us out at a nearby stop level. If price happens to move lower before we add our trailing stop then makes a new seven-day high and our open position P&L is negative, we'll call this a losing trade and simply exit at the market. However, if we have positive open position P&L at a seven-day high, we'll activate our tailing stop. Below are the results.

 

Double-7-Tailing-Stop-on-Profit.png

 

Double_7_Trail_Stop_On_Profit_EQ_Curve.png

 

This looks a lot better. We are making significantly more profit and doing it will decent efficiency based upon the profit factor value. We do take some significant heat based upon the drawdown value. Overall, the equity curve looks decent as we make more profit per trade.

 

Another Modification of Entry Signal

 

The recommendation within Stocks & Commodities Magazine recommended..."Set a buy-stop 0.1 above the close of the seven-day low, and keep moving the buy-stop down above each day’s close until you are bought in."The idea is we can often enter at a lower price if the market continues to fall dramatically over the next day. I tested this with not much promise. To me, setting a buy-stop at a level .01 above the close of the bar does not make a lot of sense. Often when setting a buy stop to enter the market you set it above a recent significant high. What comes to mind is the daily high. So, that's what I did next. When the market markets a new seven-day low, I then place a buy-stop at the high of the bar. Price must then hit that high in order for a new position to be opened, confirming some strength on the bullish side. Please note, we are adding these new entry rules but keeping our original exit. This is because I want to see how these new rules changes the system without the interference of our new exit.

 

Double_7_Stop_Entry_EQ_Curve.png

 

This significantly reduced profitability. Clearly, buying into the weakness is better than waiting for bullish confirmation. While it may "feel better" to wait for bullish confirmation before opening a long trade, the performance metrics clearly state you should be buying into weakness. In short, the original rules produce much better results.

 

Conclusion

 

This experiment was not really a test based upon the rules provided by the Stocks & Commodities Magazine reader. However, it was inspired by it. Thus, it's possible the reader's solution may be better than what I've come up with here. I really don't know. However, I think we can see some basic tenants of trading the S&P during a bull market that many readers of this website will be familiar with.

 

1) Buy into weakness with a market order.

2) Hold a trade to gain more profit.

 

These are well known tenants of the S&P and this strategy test just highlighted them once again. Other things that could be tested include buying with limit orders and exiting into strength based upon a different indicator such as a 2-period RSI. In closing, we found that our best results were realized by only modifying our exit rule to include a trailing stop.

 

 

Downloads

 

You can download the EasyLanguage source code here.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • AMZN Amazon stock, nice buying at the 187.26 triple+ support area at https://stockconsultant.com/?AMZN
    • DELL Dell Technologies stock, good day moving higher off the 90.99 double support area, from Stocks to Watch at https://stockconsultant.com/?DELL
    • MCK Mckesson stock, nice trend and continuation breakout at https://stockconsultant.com/?MCK
    • lmfx just officially launched their own LMGX token, Im planning to grab a couple of hundred and maybe have the option to stake them. 
    • Date: 2nd April 2025.   Market on Edge: Tariff Announcement and Volatility Ahead!   The US economic and employment data continues to deteriorate with the job vacancies figures dropping to a 5-month low. In addition to this, the IMS Manufacturing PMI also fell below expectations. However, both the US Dollar and Gold declined simultaneously following the release of the two figures, an uncommon occurrence in the market. Traders expect a key factor to be today’s ‘liberation day’ where the US will impose tariffs on imports. USDJPY - Traders Await Tariff Confirmation! Traders looking to determine how the USDJPY will look today will find it difficult to determine until the US confirms its tariff plan. Today is the day when Trump previously stated he would finalize and announce his tariff plan. The administration has not yet released the policy, but investors expect it to be the most expansionary in a century. President Trump is due to speak at 20:00 GMT. On HFM's Calendar the speech is stated as "US Liberation Day Tariff Announcement". Currently, analysts are expecting Trump’s Tariff Plan to impose tariffs on the EU, chips and pharmaceuticals later today as well as reciprocal tariffs. Economists have a good idea of how these tariffs may take effect, but reciprocal tariffs are still unspecified. In addition to this, 25% tariffs on the car industry will start tomorrow. The tariffs on the foreign cars industry are a factor which will particularly impact Japan. Although, traders should note that this is what is expected and is not yet finalised. Last week, President Trump stated that he would implement retaliatory tariffs but allow exemptions for certain US trade partners. Treasury Secretary Mr Bessent and National Economic Council Director Mr Hassett suggested that the restrictions would primarily target 15 countries responsible for the bulk of the US trade deficit. However, yesterday, Trump contradicted these statements, asserting that additional duties would be imposed on any country that has implemented similar measures against US products. The day’s volatility will depend on which route the US administration takes. The harshness of the policy will influence both the Japanese Yen as well as the US Dollar.   USDJPY 5-Minute Chart   US Economic and Employment Data The JOLT Job Vacancies figure fell below expectations and is lower than the previous month’s figure. The JOLT Job Vacancies read 7.57 million whereas the average of the past 6 months is 7.78 million. The ISM Manufacturing Index also fell below the key level of 50.00 and was 5 points lower than what analysts were expecting. The data is negative for the US Dollar, particularly as the latest release applies more pressure on the Federal Reserve to cut interest rates. However, this is unlikely to happen if the trade policy ignites higher and stickier inflation. In the Bank of Japan’s Governor's latest speech, Mr Ueda said that the tariffs are likely to trigger higher inflation. USDJPY Technical Analysis Currently, the Japanese Yen Index is the worst performing of the day while the US Dollar Index is more or less unchanged. However, this is something traders will continue to monitor as the EU session starts. In the 2-hour timeframe, the USDJPY is trading at the neutral level below the 75-bar EMA and 100-bar SMA. The RSI and MACD is also at the neutral level meaning traders should be open to price movements in either direction. On the smaller timeframes, such as the 5-minute timeframe, there is a slight bias towards a bullish outcome. However, this is only likely if the latest bearish swing does not drop below the 200-Bar SMA.     The key resistant level can be seen at 150.262 and the support level at 149.115. Breakout levels are at 149.988 and 149.674. Key Takeaway Points: Job vacancies hit a five-month low, and the ISM Manufacturing PMI missed expectations, adding pressure on the Federal Reserve regarding interest rate decisions. Traders await confirmation on Trump’s tariff policy, which is expected to impact the EU, chips, pharmaceuticals, and foreign car industries. The severity of the tariffs will influence both the JPY and the USD, with traders waiting for final policy details. The Japanese Yen Index is the worst index of the day while the US Dollar Index is unchanged. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.