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 or NDX 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 16 years, from 2001 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 41.78% and a maximum drawdown of -35.36% for a Risk Reward ratio of 1.18.  The strategy averaged 9.88 trades per year with an average holding period of 3.35 days.

Tables showing the month to month performance of the NQ Long I strategy from 2001 to 2016.

As can be seen in the above tables, this strategy held up well during the huge market crashes of 2001 and 2008 with a return of $6,734 and $1,310 respectively.  This corresponds to a single year percentage return of 72.80% and 14.16% of the allocated capital of $9,250.  In addition, the strategy never had a loosing year over this 16 year period.

In contrast during the same time period, the underlying benchmark, the NDX, had an average annual return of 6.73% and a maximum drawdown of -70.53% for a Risk Reward ratio of 0.095.  Over the backtesting period, the NDX had 3 loosing years and a success ratio of 52.7% up months.  Most importantly, 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.

Tables showing the month to month returns of a $9,250 investment in the NDX over the backtesting period. This is the equivalent of a buy and hold approach.

Thus, if we use the Risk Reward factor to compare the NQ Long I strategy with the benchmark, the NQ Long I strategy is 12.4 times better.  This is achieved by limiting the drawdowns and thus maximizing the Return on Capital.

Growth of $9,250 invested in the NQ Long I strategy compared to $9,250 invested in the NDX.

A second look at the performance tables for the NQ Long I strategy shows that the strategy had a total return of $18,781 between 2001 and 2008 and a total of $43,050 between 2009 and 2016.  This is due to the fact that the underlying index was significantly more bullish in the last 8 years.  The NQ Long II strategy focuses more on this period as it tries to take better advantage of bull market conditions.  The bottom part of the NQ Long II strategy page also contains a discussion of how to choose between different strategies.

It is worth noting that in the above discussion, the monies generated from the NQ Long I 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 NQ Long I 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.