My ETF Swing Trading System

My ETF Swing Trading System

August 15, 2018 0 By Jeremy


ETF Swing Trading

In my own personal Robotic Investing portfolio, I have a few strategies that I use that are not specifically tracked on this site (here are the ones I do track).  One of those is my ETF Swing Trading strategy.

The reason I don’t track it as a strategy on this site like I do with the Accelerating Dual Momentum strategy or the TQQQ Trend Following strategy is the number of trades.  The ETF Swing Trade system has a lot more trades and logistically managing it for this site would be just too much.

That said, I am going to outline the full rules and will post winning and losing examples from trades that I take.  If you want to find out when those trades happen, then please Subscribe to my newsletter and I will let you know when a new post goes up.

Background on the ETF Swing Trading System

I read a lot of trading and investing books.  For a long time I have wanted to create a system based on my market and trading beliefs where I could capture pullbacks as part of longer term trend.

I dove into a number of books and have landed on a system that I will be trading.  Here is the objective of the ETF Swing Trade system:

To identify oversold opportunities with ETFs to capture quick profits as prices revert back to the mean.

From that objective, you can easily see that this is a short-term mean reversion system that identifies ETFs that have pulled back from a longer-term uptrend and are poised to rebound.

I trade based on research and properly defined rules that have been proved to have worked by much stronger researchers than myself.  For this system, I used books written by Larry Connors, Cesar Alvarez, and Laurens Bensdorp:

There are not a lot of new approaches in trading anymore.  However, how these systems are put together is what makes them unique.

One of my key learnings from my reading of  a number of the Van Tharp books is that we must trade a system that is going to work for us.  Our market beliefs as well as mission and objectives of our trading plans must be in sync with the system we trade.  That is where my interpretation of the work of the above authors comes in.

The Wilder’s RSI Indicator

The main driver of the ETF Swing Trading system is the Wilder’s RSI indicator.  Here is the description of RSI from the help files of the charting system I use – TC2000:

RSI is a momentum oscillator that compares the magnitude of a stock’s recent gains to the magnitude of its recent losses and turns that information into a number that ranges from zero to one hundred. RSI is an overbought-oversold indicator. Stocks with high RSI values can be interpreted as having overbought positions; stocks with low RSI values can be interpreted as having oversold positions.

Essentially what the system does is it uses the 2-day RSI indicator to determine the short-term pullback of an ETF.  If the RSI(2) reading is less than five, then the ETF is bought and sold later based on the sale rules.

RSI is not the only rule to the system, but is the key component.

The ETF Swing Trading Rules

One of my beliefs is that the more complicated the system, the harder it is to follow.  As a result, I have made my version of an ETF mean reversion system as simple as I possibly could.  There are only 8 rules to the system, with only four of them involved with the screening and entry.

The rest of the rules cover the exit rules.  Money is made with the exit and managing of the position as opposed to the entry.  (Note: if you want proof of that, then check out Van Tharp’s discussion of random entries making money in Super Trader).

Here are the rules of the system, which I have programmed into TC2000 as a scan which looks at a universe of ETFs and does all the screening for me:

  1. ETF traded must be in an uptrend: must be trading above its 200 day simple moving average and has been heading higher over the past 50 days.
  2. ETF traded must be in an uptrend: must be trading above its 50 day simple moving average and has been heading higher over the past 30 days.
  3. The ETF must trade at least 250,000 shares per day.
  4. The 2-period Wilder’s RSI [RSI(2)] of the ETF closes below 5.
  5. Set position size as 1.25% of account with a 7% max loss.
  6. Set stop at 7% max loss.
  7. Buy the ETF at the open on the next day.
  8. Hold the ETF until the RSI(2) closes above 90.
  9. Exit at the open following a previous day close of RSI(2) > 90.

Here is a screenshot of the scan as it looks in TC2000:

ETF Swing Trading - TC2000 Rules

The nice thing about TC2000 is that they have a pre-loaded watch list of +2200 ETFs that I can run the screen on.  That is why I have the volume criteria – I want to only trade liquid ETFs.

One other thing to note is that depending on the market, there will be days where there are no signals.  In that case I just sit in cash and wait.

An Example Candidate

As of the day I am writing this post (August 11, 2018), the screen has identified one candidate for a trade.  The Vanguard Total World Stock ETF (VT) has seen a sharp pullback.  It still trades above the 200 day simple moving average (but it is close) and still moving higher, and the RSI(2) reading is < 5 at 4.61.  Here is the chart:

ETF Swing Trading - TC2000 VT Example

On Monday I am going to enter a buy order at the open for VT and will set the stop at 2% of my equity.  This will give the position room to run and revert to the mean.  Once the stock is RSI(2) > 90, I will start to watch for the sale.  As long as the stock is above the 8 day moving average, I will hold.  As soon as it closes below that 8 day moving average, I will sell next day at the open.

I look forward to seeing how it does.

Not all Trades Will be Successful

As with all trading systems, not every trade is going to end in profit.  The key is managing the exits so that losses are limited and the positions are allowed to capture as much profit as possible.  The rules of the system have been designed to do that.

However, I know that it is not going to work out each time.

I am going to be watching the system closely and tracking all trades to make sure that the profits/loss ratio is at least 3:1, preferably higher.  I will continue to let you know how that progresses (please subscribe!).

Next Steps

This is a fully systematic system, and I am going to try my hardest not to let my emotions come into play here.  I want to take all signals that come at me and not question the system or add any discretion.

Larry Connors and Caesar Alvarez has shown that a system like this can be profitable in their books and I have done my own analysis by looking at prior trades the system would have made.  I know it can work, if I let it.

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Featured Image: Cayman Island Starfish by Gary