One drawback of the NQ Long Strategy is that it takes into consideration the period from 2000 to 2003 which included the Dotcom bubble burst.
During the 1990s a lot of venture funding capital went into technology companies with the hope that one day these would turn a profit. This included a lot of speculation and when a lot of these companies folded and most of these profits failed to materialize the Nasdaq 100 index came crashing down with them. From its peak of 4691.61 in March 24, 2000 it dropped to a low of 815.40 on October 4, 2002 for an -82.6% drop in value.
Although one can never say with certainty if a situation like this is going to happen again in the future, the companies included in the index today are much more viable than those listed in 2000 and the years leading up to it. Thus, a market downturn is not likely to be as bad. For example, during the financial meltdown of 2008 the Nasdaq 100 index went from a peak of 2213.86 on November 2nd, 2007 to a low of 1064.70 on March 6th 2009 which represents a drop of -51.9%.
Including these extreme case scenarios in the backtesting modeling process offers the advantage of having a strategy that is better suited for market crashes. However this comes at a cost as slow and steady up trending markets such as those of 2003 and 2013 are not taken advantage of as they are not picked up by the system.
To mitigate this effect one can exclude extreme periods from the modelling process and give more weighting to more recent market conditions. This was done by backtesting the strategy over the last 11 years, from 2006 to 2016. Doing so one generates different strategy parameters that are more suited to moderate market conditions. We use these parameters for the NQ Long II.
During this period, from 2006 to 2016, the NQ Long II strategy had an average annual return of 47.87% and a maximum drawdown of -52.09% for a Risk Reward Ratio of 0.92. It averaged 7.9 trades a year with an average hold of 4.53 days.
In particular, this strategy took full advantage of the recent market conditions posting oversized returns of 194.63% and 150.2% on the allocated capital of $8,000 in 2015 and 2016 while mitigating downturns with small losses of -0.56% in 2008.
During the same period, from 2006 to 2016 the benchmark had an average annual return of 16.52% and a maximum drawdown of -86.77% for a Risk Reward Ratio of 0.19.
Using the Risk Reward ratio as a comparison metric, the NQ Long II strategy is about 5 times better than a buy and hold approach in the Nasdaq 100 index.
A second look at the performance tables for the NQ Long II strategy shows that it just about broke even in the first 10 years, from 1999 to 2007. This is much better than the index which has a loss of -$34,195 over the same period but not as good as the NQ Long I which had a gain of $37,651 over the same period.
Since the optimization and backtesting was done from 2006 to 2016, 1999 to 2005 constitutes an out of sample data set. The numbers above demonstrate the the strategy is stable although not optimal in unfavorable market conditions. The question then becomes, which strategy should one use NQ Long I or NQ Long II? There are three possible answers to this question:
- If you think that another 2000 scenario is unlikely then you might favor NQ Long II. This strategy was almost flat in 2008 which was a strong down market but also took advantage of a strong up-trending market such as 2013 and 2014.
- On the other hand, if you think that the recent bull market is close to being done and we might be in for another downturn soon, then you might prefer NQ Long I as it does better in down markets.
- Finally, if like me you don’t like to guess as to what the market is going to do next, then you would want to allocate capital to both NQ Long I and NQ Long II. That way, no matter what the market does you”ll be well positioned to take advantage of it.