You’ve probably heard it many times : ” Buy low, sell high.”  This beckons the question : ” How low is low and how high is high?”  Every day the financial news media is full of people giving their opinion on whether the market is going higher or lower.  It is not uncommon to find different people with different views on the same day.  Can you guess who’s right?

This strategy takes the guess work out of the picture by taking a quantified approach to finding an answer to the question: “How low is low and how high is high?”.  The system takes advantage of short term swings in the market, going in when it deems the market to be at a short term “low” and exiting when it thinks the market has reached a short term “high”.

This logic is applied to the Russell 2000® Index Mini Futures denoted by the symbol TF.  The Russell 2000® Index or RUT is the recognized benchmark measuring the performance of the small-cap segment of the U.S. equity universe.  Thus this strategy effectively identifies short-term value investment opportunities in the small-cap segment of the US equity market.

The strategy was backtested for a period of 11 years, from 2006 to 2016, and showed an average annual return of 62.07% with a maximum drawdown of -60.81% for a Risk Reward ratio of 1.02.  The strategy has around 22 trades per year with an average hold of 4.33 days.

Over the backtesting period the strategy never had a loosing year and showed a success rate of 76.52% up months.  In particular, the strategy performed well in high and low volatility environments and posted positive results in the down years of  2007, 2008, 2011 and 2015.

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

In contrast during the same time period, the underlying index and benchmark, the RUT, had an average annual return of 9.24% and a maximum drawdown of -59.89% for a Risk Reward ratio of 0.15.  Over the backtesting period, the RUT had 4 loosing years and a success ratio of 60.61% up months.

Table showing the month to month returns of a $10,000 investment in the RUT 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 two strategies the TF Pull Back strategy is about 7 times better than the buy and hold approach as it generates higher returns with less drawdown.

Growth of $8,000 invested in the TF Pullback compared to $8,000 invested in the RUT.

It is worth noting that in the above discussion, the monies generated from the TF 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 TF 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.