What is the name of this simple (unbreakable?) strategy?

Discussion in 'Strategy Building' started by KevinQBD, Apr 25, 2009.

  1. KevinQBD


    (Disclaimer: This strategy results in a total of 6% return using SPY from the October 2007 highs until today. From October 10, 2008 it results in a 17.62% return)

    If one were to buy on a 3% drop and sell on a 3% gain, and repeat this process, is there a technical name for this other than buying low selling high? Something in regards to taking advantage of volatility?

    Consider this example. An ETF performs the following over a 6 day period:


    If one were to put $1k down on each drop, and sell each 'bundle' upon each gain:

    -3% buy $1,000
    -3% buy $1,000
    -3% buy $1,000 (here at the bottom, $3k is invested)
    3% sell $1,030
    3% sell $1,029
    3% sell $1,028

    The profit is $87 for an investment up to $3,000, for almost a 3% return. Repeat this process enough, and the returns add up.

    Basically the more volatile the stock (or preferrably ETF), the higher the returns.

    It seems to me there has to be some sort of technical name for taking advantage of volatility (and I am not referring to options of course).

    The only time this strategy does not work in the long run is when a market only goes down. It even works on the Nikkei.

  2. MGJ


    It's called DipBuying. Your specific example is "DipBuying with Profit Target Exit and No Allowance For Commissions or Slippage".

    Try it out on past history. Put it in a spreadsheet, insert historical prices, and run. Plot the Net Asset Value of your account versus time. Don't forget that your broker needs to get paid (we call that "commissions"), and so do the floor traders, market makers, and ECN operators who execute your trade (we call it "slippage").

    Here's some free historical price data that I downloaded at no cost from Yahoo Finance. Compliments of the chef.
  3. KevinQBD


    Thanks for the reply and information. I did do some backtesting. I actually wrote some software to test my volatility theories on historical data (I'm a software engineer by day).


    It turns out the 3x funds work fantastic for this technique. Unfortunately my online research on volatility usually only leads to options trading. After looking up the dip buying strategy, it seems to differ in that dip buyers wait for a good setup before making their trades, where my technique just buys and sells no matter what, just based upon a percentage threshold.

    Thanks again,
  4. C99


    what you're doing is called scale trading and trying to capture oscillation profits. more common with physical commodities, but no reason the idea can't be extended. Usually produces a profit profile with high percentage winners but those few losers are large.

    Trick is to know ahead of time what spacing on the scale levels will allow you to capture the volatility without blowing out. I would guess your 3% would not have produced many trades in the years previous to 07.
  5. KevinQBD



    I think you nailed it, thanks. Scale Trading appears to be the term I was looking for. This article describes it very well:


    It also describes the downsides of this technique, which confirms the same downsides I saw in my backtesting results.

    Here is another link

    This technique on a a pair of hypothetical bull/bear leveraged 3x ETF from the 2008 peak until now results in a >100% return. But, as they always say, past performance does not guarantee future results.

  6. KevinQBD