A lot of people would like to find a strategy that makes money when the equity markets fall. How great would it be if your portfolio can have a positive year during a recession such as that of 2008?  This is possible if one deploys other strategies besides buy and hold.

When a market is going up or down it typically does so in a non linear manner forming waves or cycles along the way.  One can find short term downturns in a longer term uptrend market and short term upturns in a longer term downtrend market.  Just like the TF Pullback , the NQ Long I strategy finds value by identifying short term downtrends in a longer term up-trending market.

The strategy is applied to the E-mini Nasdaq 100 Futures denoted by the symbol NQ.  These futures are based on the Nasdaq 100 Index which includes 100 of the largest US and international companies listed on the Nasdaq stock market based on market capitalization.  This index is frequently used to manage technology exposure due to its heavy technology sector weighting.

Chart showing the Nasdaq 100 Index over the backtesting period. Note the shorter term counter trend movements or cycles within the longer term trends. Picture courtesy of Google finance.

This strategy was backtested over a period of 17.6 years, from 1999 to 2016.  This included the technology bubble burst of 2000 as well as the financial meltdown of 2008.  During this period the strategy had an average annual return of 32.75% and a maximum drawdown of -45.78% for a Risk Reward ratio of 0.72.  The strategy averaged 6.36 trades per year with an average holding period of 1.55 days.

Table showing the month to month returns of the NQ Long I strategy over the backtesting period. The number in the last column on the right shows the total performance for the previous 10 year period.

As can be seen in the above tables, this strategy did very well during the huge market crashes of 2000 and 2008 with a return of $17,438 and $5,510 respectively.  This corresponds to a single year percentage return of 232.5% and 73.5% of the allocated capital of $7,500.

In contrast during the same time period, the underlying benchmark as described by the NQ continuous back adjusted futures had an average annual return of 2.07% and a maximum drawdown on allocated capital of -95.75% for a Risk Reward ratio of 0.02.  In addition, as illustrated in the Nasdaq 100 chart above, as of the end of 2016, the index had just about reached the same highs as it had reached 16 years earlier in 2000.

Table showing month to month performance of the benchmark NQ futures over the backtesting period. This is the equivalent of a buy and hold approach in the Nasdaq index. The number in the last column on the right shows the total performance for the previous 10 year period.

Thus, if we use the Risk Reward factor to compare the NQ Long I strategy with the benchmark, the NQ Long I strategy is about 35 times better.  This is achieved by limiting the drawdowns and thus maximizing the Return on Capital.

A second look at the performance tables for the NQ Long I strategy shows that the strategy had no trades at all in 2003 and 2013 and very small returns in 2015.  This is addressed in the NQ Long II strategy.  The bottom part of the NQ Long II strategy page also contains a discussion of how to choose between different strategies.