This study of Intra-Day Momentum Method for ETFs, applies the Daily Directional Indicator with the Intra-Day Reversal filter. Three market-based ETFs have been used in this study – SPY, DIA, and QQQ. The time period for this study is February 2022 through August 2022.
This study attempts to determine the short-term market direction using recent market activity. The Daily Directional Indicator is used to determined short-term market direction. At that time, it will indicate whether to trade Long or Short. This strategy is designed to trade in the direction of the longer-term trend.
This study is the by product of a few other studies that I have conducted. Does Trend Following Give a Trader an EDGE? as well as Improving the Accuracy of The Intra-Day Momentum Method.
The application of the model, the rules, and the stats are shown below.
Results
For the most part, this strategy has a very good Win Percentage (63%). The Win/Loss ratio (1.27) is also very good. When examining these results. Keep in mind that this strategy does not utilize a stop-loss, profit-target, or position sizing. It does a good job of managing risk, without them. A question one might consider. Is this strategy effective at managing risk because you are trading in the direction of the longer-term trend?
Improving the Results
In a separate study, I apply a stop-loss to this strategy. The stop-loss is applied when there is a divergence between the DDI and the IDMM. View that strategy and it’s results here: IDMM – ETFs – DDIRS (Coming Soon!)
As you can see, this approach does well on it’s own. In order to improve this strategy, we are going to look at five different ways to improve or optimize this strategy.
- Modify the Entry
- Use a Stop-Loss
- Use a Profit-Target
- Use Position Sizing Algorithms
- Optimize Based on Patterns
Modify the Entry
We can improve the results by entering on a pullback. The pullback would occur when the IDMM and DDI are in confirmation. This pullback can be calculated from the Current High/Low of the Day or from the ML1/MS1 Level. First thing to remember is that the strongest and weakest stocks do not pull back all that much. However, all intra-day reversals do. A pullback that is 25-50% from the level would definitely a reasonable entry.
Stop-Loss
A stop-loss would help improve the results of this strategy. For additional information on stop-losses, read this article – Stop-Loss Placement (Coming Soon!)
Profit Target
Profit targets may also improve the results of this strategy. For more on profit targets, view this article – Profit Targets Placement (Coming Soon!)
Position Sizing
In order to manage risk effectively, we need to size the position accordingly. To normalize risk you would use the following equation.
Pattern Optimization
Find patterns that present higher probabilities of success for this strategy. It would also be a good idea to know what patterns present problems for this strategy.