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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?


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.

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