Thursday, July 18, 2024

Daily Up & Up or Down & Down Trading Strategy

On a recent podcast I heard about how Renaissance Technologies a top hedge fund founded by Jim Simons started with a simple formula. The idea was basically that if a stock traded up one day then it was more likely to trade up the next day. The opposite also should be true, if the close is lower than the open on one day, the next day is more likely to close lower. (Perhaps there’s a better name for this strategy like ‘Buy the Green Days’, but it doesn’t seem to be talked about much. It has similarities to buying the first green day pattern, but it’s not identical).

I thought, this sounds way too simple, but could there possibly be something in this?

I decided to do a very quick check with data on the S&P 500 , FTSE 100 and Apple.

I created 2 scenarios, firstly that the position was entered right at the very end of day 1 and secondly that the position was opened at the beginning of trade on day 2. The results came in as follows.

Index/StockDay 1Average Gain on Day 2 (Close Day 2 – Close Day 1)Average % Gain on Day 2 (Close Day 2 – Close Day 1)Average Gain on Day 2 (Close Day 2 – Open Day 2)Average % Gain on Day 2 (Close Day 2 – Open Day 2)
S&P 500 (2000 to 2015)Pos + (Green)-0.65-0.05%-0.58-0.04%
S&P 500 (2000 to 2015)Neg – (Red)1.100.09%1.010.09%
Apple (1 Year till 22/11/23)Pos + (Green)0.290.18%0.340.21%
Apple (1 Year till 22/11/23)Neg – (Red)-0.03-0.01%0.090.06%
FTSE 100 (2000 to 2015)Pos + (Green)-1.93-0.03%-1.91-0.03%
FTSE 100 (2000 to 2015)Neg – (Red)0.890.03%0.880.03%

The first thing to notice is that actually the FTSE 100 & S&P 500 seem to be more likely to have a red day following a green day. The opposite was also contradictory to our original theory; a red down day was more likely to be followed by a green positive day.

The stats for Apple were only for the last year. It does appear that a green day is more likely to be followed by a green day, however Apple in this period has been trending upwards, so I’d be wary of this correlation.

Should we then Buy the FTSE 100 & S&P 500 after a red day?

Perhaps doing the opposite to our strategy could work? Well Probably not. The % change is so small that any spreads or fees would make this unviable.

Note this includes over weekends, so Friday to Monday.

Conclusion on The Daily Up & Up or Down & Down Theory

After this tiny bit of research, I decided to not look into this further, even if you are leveraged the percentages are way too small to make a valid trading strategy. Perhaps it worked in the past or perhaps it works when coupled with other indicators, but on it’s own this is probably a waste of time.

Leave a Reply

Your email address will not be published. Required fields are marked *