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Holding DV2 Extremes above and below the 200dma – Short

April 15, 2010

by Enn Kuutan

Last post we looked at the absolute and risk adjusted returns for long positions above and below the 200dma, initiated by extreme oversold conditions in the oscillator (DV2<20). This time we’re going to flip it around and look at short positions after overbought readings (DV2>80). Let’s take a look and see what we can learn….

No surprise here, average short trades above the 200dma are flat for short holding periods and go negative if you hold on too long. When the trend is your friend below the 200dma, profitability skyrockets up to an optimal holding period of 7 days for absolute returns. Next let’s look at the risk metrics…

Looking at the DVR, we see a clear winner with significant out-performance across the spectrum for the short trades below the 200dma versus those above. Interestingly, both curves deteriorate as the holding period increases, an effect that I would speculate is caused by the fierce rallies seen in bear markets.

Bringing up the rear is the Win/Loss ratio for trades. Here the picture is less clear although short trades below the 200dma still have the upper hand for the most part. This is why we prefer to look at the DVR, a superior way of distinguishing the reward to risk in trades! In the end, trading within the context of the larger trend was shown to be superior in absolute and risk adjusted terms when looking at the short side. But what happens when the definition of trend is changed? How about if we filter by the 50dma? To be continued……

One Comment leave one →
  1. Jeff Pietsch permalink
    April 15, 2010 7:38 pm

    Welcome aboard Enn! Nice post!

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