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QQQQ Crash
Overview
This strategy seeks to buy when the stock makes a statistically significant (1.5 standard deviations) move below its 10 day moving average and then sells on the first profitable day or after 20 days of holding an unprofitable position. Although this system was created to use the QQQQ ETF, it may be used for other stocks as well.
Parameter Description
This strategy uses three different parameters: Bollinger Period (default 10 days), Standard Deviation (default 1.5) and Timed Exit (default 20 days).
A Bollinger Band is a technical indicator intended to show support and resistance levels for the price of a given stock based on recent volatility of the stocks price. A Bollinger Band is created by choosing the period (number of days) for the moving average calculation as well as the number of standard deviation. Generally, Bollinger Bands are drawn on a chart as both an upper band (resistance) and a lower band (support) against which price movement is tracked. In this strategy only the lower Bollinger Band is charted.
The Bollinger Period is the number of days used in the moving average calculation when creating the Bollinger Bands. The default period used in this strategy is 20 days.
Standard Deviation is a measure of the dispersion of data from the mean. The greater the spread, the higher the deviation.
Timed Exit is the number of days after which an unprofitable position will be sold.
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- Gap
- QQQQ Crash
- Gap Filler
- For this illustration, stock ABCD closes 1.5 standard deviations below its 10 day moving average on Monday.
- A trade signal is generated to buy ABCD at Market. The user receives the trade signal and places the trade on Tuesday. For this example let's assume ABCD was bought at $50.
- Stock ABCD closes Tuesday at $49.
- Stock ABCD closes Wednesday at $50.
- Stock ABCD closes Thursday at $51.
- A trade signal is generated to sell ABCD at Market. The user receives the trade signal and places a trade to sell ABCD on Friday.
Advantages/Risks
As with any system dependent on market declines, there is no guarantee that the market dip that triggers this system will reverse. Also, when trading this system just with the QQQQs, trading capital will be sitting in cash most of the time. This system, while having a good success rate, only trades after significant broad market sell-offs. Therefore, trading this system for the QQQQs is only suitable as an adjunct or additional trading system and is not a substitute for other systems or investments that offer the opportunity to be in the market more frequently.
Reducing the thresholds for triggering the system can increase the number of trades but decrease the success rate. Testing against a broader range of stocks may also offer more trading opportunities. However, trading with individual stocks or narrowly-based indices, versus the QQQQs or other more broadly based indices, may generally not be as successful. The success of this system is dependent on a broad, sharp market downturn rather than a decline in an individual stock.
As with any trading system, money management is important to success. You should not commit more than a very small amount of your trading capital to this system.
And like all Backtesting strategies, the past performance of the QQQQ Crash strategy is no guarantee of future results.
Source of This Strategy
This strategy was first published in James Altucher's book, "Trade Like a Hedge Fund".
The Trading Strategies and Backtesting feature and trade signals generated by the strategies are provided for educational purposes and as examples only, and they should not be used or relied upon to make decisions about your individual situation. You may modify the backtesting parameters as you see fit. Fidelity is not adopting, making a recommendation for or endorsing any trading or investment strategy or particular security. The Backtesting feature provides a hypothetical calculation of how a security or portfolio of securities, subject to an example trading strategy, would have performed over a historical time period. Only securities that were in existence during the historical time period and that have historical pricing data are available for use in the Backtesting feature. The feature has only a limited ability to calculate hypothetical trading commissions, and it does not account for any other fees or for tax consequences that could result from a trading strategy. You should not assume that Backtesting of a trading strategy will provide any indication of how your portfolio of securities, or a new portfolio of securities, might perform over time. You should choose your own trading strategies based on your particular objectives and risk tolerances. Be sure to review your decisions periodically to make sure they are still consistent with your goals.
Past performance is no guarantee of future results.
