TQQQ Trend Following Rules-Based Strategy Summary

TQQQ Trend Following Rules-Based Strategy Summary

July 21, 2018 2 By Jeremy


TQQQ Trend Following Rules-Based Strategy

Investing in a TQQQ trend following rules-based strategy will be very counter-intuitive to a lot of the dividend-based and more conservative investors out there. It is a high-risk, high-reward strategy that will have very wild swings through the years.

So why use such a strategy? The first reason is my believe in technology as an investment. TQQQ is based of the QQQ which tracks the Nasdaq 100:

The Nasdaq 100 Index is composed of 100 of the largest international and domestic companies, excluding financial companies, that are listed on the Nasdaq stock exchange, based on market capitalization. Therefore, QQQ is heavily weighted toward large-cap technology companies and is often viewed as a snapshot of how the technology sector is trading.

It is hard to argue that technology companies and their products will continue to drive the economy and I want to have a concentrated part of that.

The second reason I use a TQQQ rules-based strategy is because of the potential for results based on the backtested data. Obviously prior performance is no indication of future success, however I recognize that over the long-term stocks tend to go up and one of my rules for this strategy is a long 10+ year holding period. With the backtested results I was able to generate, combined with my trend following approach, I am comfortable committing to this strategy. Read on to learn more about it.

What is TQQQ

TQQQ is a leveraged product based on QQQ. TQQQ strives to deliver 3x the daily returns of the NASDAQ 100. In as simplified way as possible, if QQQ rises by 1% on a particular day, TQQQ should go up by 3%. Of course it does not work out exactly like that due to fees, but it comes pretty close.

Most leveraged products are intended to be used on a daily basis. Over periods greater than a day the issuers of the funds are clear that they don’t guarantee the returns will match the index. Here is this right from Proshares:

Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks…

That is a big concern, and exactly why I put in the circuit breaker with the trend following system.

But first, lets look at some of the backtest data.

The TQQQ Backtest

The trouble with backtesting a TQQQ strategy is that the data sets are limited. The inception date of the fund was only 2010, so there is only 8 years of data. That is not enough to generate any type of reliable backtest or confidence about a buy and hold strategy.

Since 2010 we have seen some ups and downs, but nothing like we saw in 2008. Without being able to test that, we are unable to test the strategy through different market cycles. Since 2008, we have basically been in one long bull market where TQQQ has benefited massively.

That said, here are the results going back to 2011 (just after the ETFs launch in December 2010):

Robotic Investing Rules-Based Portfolio - TQQQ GrowthRobotic Investing Rules-Based Portfolio - TQQQ StatisticsVery strong results in terms of CAGR and final balance. The Sortino Ratio also good, highlighting the reward for the risk taken. The concern is the drawdown, even without going through a 2008-like event. Compared to the S&P500, the drawdown was almost double, which is not an easy thing to hold through.

However as discussed, without being able to backtest prior to 2011 we can’t be sure how the system would have fared. It is safe to say that a massive drawdown would have occurred. This post from Greg Hudson, who did some basic simulation of returns back to 1986, saw that TQQQ would have seen 99% drawdowns at some point.

I need to manage that potential drawdown, which is why my approach is to use a trend following approach to the strategy.

What is a Trend Following Strategy?

Trend following is all about identifying the trend of a market or asset, and invest with the trend until the trend breaks. Here is the description from Wikipedia, which is one of the simplest explanations I have read:

Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.

A very common trend following strategy is to sell equities when the S&P500 closes below its 10-month moving average and then re-buy when it closes above its 10-month moving average. This simple system will get you out of the market when the trend is down, and get you back in when the trend it up.

A common misconception about trend following is that the returns are better. That is not always the case. Trend following has more to do with risk management than return generation. By selling when the trend starts to point down, you protect any further downside.

That is the approach I am going to take with my TQQQ trend following strategy. I will be able to participate in what I believe will be continued strong growth in the NASDAQ 100 over the next 20 years, while protecting the downside with a circuit breaker.

Read on to learn about exactly what the strategy is.

Robotic Investing TQQQ Trend Following Strategy

So instead of buying and holding TQQQ and risking massive drawdowns, I am going to protect my capital by implementing a trend following strategy.

Here are the specific rules I use:

  1. TQQQ must be in a positive uptrend to trade. It must be trading above its 200 and 50 day simple moving average. If not, then TQQQ is not purchased.
  2. TQQQ is purchased at the Open following two consecutive days trading above the 200 day simple moving average.
  3. Set a trailing stop at the 50 day simple moving average.
  4. If TQQQ closes below the 50 day simple moving average, then sell next day at the Open.
  5. As long as TQQQ continues to trade above the 200 day simple moving average, then repurchase TQQQ at the open on the third day after the two previous closes were above the 50 day simple moving average.

The rationale for this strategy is that I protect my capital by exiting when the trend breaks down. I then re-buy when the 50 day trend starts up again.

Note: I use Tc2000 to monitor my portfolio, run the calculations for my Accelerated Dual Momentum and other momentum strategies, as well as track moving averages for the TQQQ Trend Following strategy. If you want to give it a try use this link to get $25 off.

A trend following strategy like this is not about better returns – it is about capturing those returns while protecting my capital. With this simple system I am able to do that while getting back in to participate in any future trends.

TQQQ Whipsaws

One of the challenges with a moving average system like this, is that there will be periods of whipsaws when the market is non-directional. There may be periods of time when the strategy would have me move in and out of TQQQ multiple times as the 50 day moving average is broken. That will increase trading costs as well lock in some losses, but that can be overcome by not giving up and sticking with the strategy.


As you can see in the Robotic Investing portfolio description, I personally invest in this strategy.

In addition, as with other portfolios on Robotic Investing, I track real-world implementation of the TQQQ Trend Following Rules-Based Strategy. To see how the portfolio performs in real-time and the real world, check out all the blog posts tagged with TQQQ Strategy category.

Disclaimer: The information provided on this site is for education purposes only. The author is not a registered financial adviser and the ideas discussed on the site are just trading analysis and not recommendations. Robotic Investing doesn’t endorse any of the comments that might appear on the discussion threads. There is no guarantee for those comments to be accurate. By reading this site you automatically agree that Robotic Investing is not responsible for any of your trading decisions. Remember not to risk money that you cannot afford to lose. RoboticInvesting.com and all its products are Copyright© by Robotic Investing and property of Robotic Investing. All Rights Reserved.

Featured Image: Watch This by Justin Jensen