One of the most popular futures markets, the ES or E-Mini S&P 500 futures track the performance of the S&P 500 index.  Widely regarded as the best single gauge of large-cap U.S. equities, the S&P 500 index captures approximately 80% of available market capitalization.

As the old saying goes, the two main driving forces behind market moves are greed and fear.  In particular the market tends to come down fast in the face of bad news only to recover some or all of its losses after the news has been digested and the emotions subside.

The ES Pullback strategy exploits this market characteristic by buying the market when it identifies good value.  The strategy was backtested for a period of 12 years, from 2005 to 2016, and showed an average annual return of 64.24% with a maximum drawdown of -34.90% for a Risk Reward of 1.84.  The strategy has around 33 trades per year with an average holding period of 1.04 days.  It also showed a success rate of 53.5% up months.

In particular it is worth noting that the strategy never had a loosing year from 2006 onward, including the highly volatile years from 2008 to 2012 and the more recent lower volatility years.  It’s worse year was in 2005 where it posted a break even year.  All numbers include subscription fees and commission costs.

Table showing the month to month returns of the ES Pullback strategy over the backtesting period.

In contrast during the same period, the underlying index and benchmark, the S&P 500, had an average annual return of 7.06% and a maximum drawdown of -56.78% for a Risk Reward ratio of 0.12.  Over the backtesting period, the S&P 500 had two loosing years and one breakeven year and a success ratio of 61.11% up months.

Table showing the month to month returns of a $7,000 investment in the S&P 500 over the backtesting period. This is the equivalent of a but and hold approach.

Thus, if we use the Risk Reward factor to compare the two strategies the ES Pull Back strategy is about 15 times better than the buy and hold approach as it generates significantly higher returns with less drawdown.

Growth of $7,000 invested in the ES Pull Back compared to $7,000 invested in the S&P 500.

It is worth noting that in the above discussion, the monies generated from the ES Pull Back strategy were not re-invested in the system.  On the other hand, by its nature, a buy and hold approach automatically re-invests any monies that are generated.

Thus one could potentially increase the returns of the ES Pull Back system by re-investing some of the monies generated.  That said, investing in the Futures Markets requires different considerations than investing in a stock or an ETF.  For a more complete discussion between the two approaches, including risk considerations and money management, please read our post Investing in the Futures Markets.