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How does a long-only system survive in a bear market?

Dear C2 community members,

A few days ago, I received a question asking that if your system only traded long TQQQ, how could it survive in a bear market. Recently I had a trade which turned a bad entry into a winning trade. This trade bought 200 @101.46 TQQQ on 1/23/2020 and it sold the last 100 @98.67 on 1/29. The first buying price was higher than the last sold price; however, this trade still made $141 after fees. The system scaled in positions of 400 shares on 1/23, 1/24 and 1/27. The last buying price was 91.72 which was close to the lowest price on 1/27. It scaled out positions at prices 93.18, 95.20, 97.33 and 98.67 in the span of three days. The last 100 shares were sold at a price of 98.67 which almost reached the highest price of 98.96 on 1/29. Here are the details of this trade (you can also find them in the trade details of system Synthetic TQQQ).

Though there may have been a little luck involved in this specific trade, it demonstrated how a long-only strategy can still be profitable in a bear market. Synthetic TQQQ is a long-only system that only trades one ETF, TQQQ. This system is designed for non-marginable accounts such as IRAs and 401ks. This strategy is comprised of a mix of trend following and mean-reverting strategies. In a bear market, the trend following strategy will not generate long positions, i.e. filtered by momentum indicators. For the mean-reverting strategies, it will try to buy at low and sell at high with different parameters for a bear market.

Is this an advertisement for martingaling?

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Think so lol

I have a long only strategy that trades calls on strong stocks, recession drawdown and returns will beat what the index does due to buying strong stocks, even during a recession… no martingaling and I have stops…

@Tony_Pei, what happens if the TQQQ kept going down? Do you use stops?

The method your showing resembles a martingale/average down strategy which is quite common at C2 that is why everyone is curious if you use stops or have stop levels?

I would recommend the book “Success in Commodities…The Congestion Phase System” by Eugene Nofri. It shows you how to trade in a downtrend with 16 profitable patterns. I consider blind average down as a martingale. However, if you trade in a downtrend with chart patterns, the probability of winning should be on your side.

This answers the previous questions about stops. Well, why use stops when you have your magical patterns.

What happens if the TQQQ kept going down? Do you use stops?

The short answer is yes, I use stop loss. Synthetic TQQQ is comprised of five individual sub-strategies. Each sub-strategy has multiple of its own exit rules. Some sub-strategies have a stop loss rule. However, in a downtrend, the stop loss price rarely gets hit. The reason is that the mean-reverting sub-strategies will take a loss to exit a position during the bounce back before the price reaches the stop loss level. Since ETF TQQQ is composed of 100 Nasdaq stocks that makes it very rare to have multiple consecutive down days without a single bounce back. Backtesting 20 years of QQQ shows that Synthetic TQQQ has had positive returns every year, including the 2000,2001,2002,2008 bear markets. I used QQQ for the 20 years backtest since TQQQ only has about 10 years of data.

In order for a long-only system to survive in a bear market, the key point is to first determine whether it is a bear or bull market. I use a Bollinger Bands based indicator to determine the market direction. Please see the chart below: blue indicates a bull market and red indicates a bear market. Instead of just avoiding trading using long strategy in a bear market, one of the Synthetic TQQQ’s sub-strategies trades when the market is deep in a bear territory, which is shown in the below chart with the red dots. It determines the entry point by combining the Nofry downtrend patterns (see the book, Success in Commodities…The Congestion Phase System” by Eugene Nofri) and mean-reverting strategies. Those trades have a high probability of winning in a bear market. The blue dots in the chart are used for another sub-strategy which only trades in a bull market.

@Tony_Pei, looks like a pretty rough day for your long only system without stops. If we were in a bear market how does your system make a profit out of that type of market?

Notice we haven’t had one for quite a while so bullish strategies will make money but we could be entering a new phase of either sideways or downwards movement. Any statistics on bear markets for your system?

https://intlstockexchange.com/

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You kill me, Arbi! :joy:

I was going to try to defend this guy a little this morning, despite it being a martingale system. Unless he got out last week, like my strategies did, any stop loss would have triggered with a 600 point loss at the open this morning which wouldn’t be ideal. But then I saw his closed trade and he continued to martingale into his losing long positions this morning.

Its scary @EthosPortfolio, it takes great skill to average down so its not surpising that there is no ‘get out point’ for this system.

But markets are rising overnite as I type this message so who knows he may get lucky and come out with a profit still…but its scary knowing what would happen if the markets had continued to drop.

I was looking for the developer to reply as to how he would have handled a bear market. If there was no reply I would assume there is no provision to handle such an event.

I believe he closed this trade and took the loss. Hopefully he didn’t go on a tilt and go short on a 1000 point down day.

I don’t use a stop loss on my strategy either. I use a reversal in one of my indicators to tell me when to get out of a losing trade. But I also don’t rely entirely on indicators when there is major news headlines affecting the markets. Last week my system was still suggesting that we had a little more room on the upside. I didn’t like how the news was setting up for the weekend so I pulled the plug and went to cash. Too bad though. A couple more up days and my system would have gone short into this pullback instead of hiding in cash. Can’t complain too much though.

I would like to share two messages I sent to subscribers to explain how Senthetic TQQQ works.

Sun, Feb 23, 2020, 11:04 AM
Dear Subscriber,

First, thank you for subscribing to Synthetic TQQQ and for your confidence in this trading system.
Last week the TQQQ dropped 9% from its highest and Synthetic TQQQ suffered about 7% in C2. I completely understand how you feel, since I also trade this system in my own IRA account. I traded 200 shares per sub-strategy which is 200% scaling. Even though the market could always drop further, especially with the recent news concerning the coronavirus, please don’t panic. I will continue to strictly follow this system’s signals. I trust this system, that is why I put my own money in it. My strong confidence in this system is based on the 20 years of backtesting results that support it. During those 20 years, the market has experienced various bear markets. The chart patterns of bear markets are similar regardless of the reason. The system is based on chart patterns and the backtesting results have shown that each year has provided positive returns. However, to prepare for the worst, I will reduce the share size for each sub-strategy from 100 to 80 for new entries. If you are interested in the backtesting results of this system, please provide me with your email address, since this messaging system doesn’t seem to work well when the message size is large. Best Regards, Tony

Mon, Feb 24, 2020 9:58 PM
Dear Subscriber,

Today was a rough day for the market and Synthetic TQQQ. Before the market opened, TQQQ had already dropped 10.96% from last Friday’s close, and Synthetic TQQQ held 300 shares at that time. One sub-strategy had a buy signal at market opening. As I explained in my last message, I followed the signal and bought 80 (instead of 100) shares at the market opening at $95.88. Surprisingly, I got a margin call from C2 and C2 sold all 380 shares at 10:01 A.M. at $99.26. Fortunately, due to the margin call, I gained an extra 380 * (99.26-95.88)=$1,284. After the margin call, I messaged C2 for an explanation, and it turned out that TQQQ requires 75% margin from the long side. Right now TQQQ is $97.89 and this model account has 28K. So this account can hold, at most, 380 shares of TQQQ. That means in order to trade five sub-strategies, each sub-strategy can only trade about 70 shares. So I decided to trade 50 shares for each sub-strategy for now. At noon, I bought back 50 x 4 = 200 shares at price 94.56. Before the market closed, one sub-strategy exited, so at the end of the day, three sub-strategies stayed on the market with 150 shares. Eventually, at closing, Synthetic TQQQ account dropped 6.7% while the TQQQ dropped 11.52%. Best Regards, Tony

No one cares about your stupid explanations. I hope there is no such stupid person who would pay for such a loser strategy

I think most of us were thinking this but didn’t want to say it.
I don’t think there’s any fear of that.

The biggest fallacy with this strategy, besides martingaling, is believing surviving a 2% pullback is somehow “surviving a bear market”. This is the problem with a lot of traders who have never traded through a 20% bear market.

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