Gold – A Contrarian Approach 6/9/12

Over the last few weeks, I have been doing some back testing using my top 40 trading systems against the market indices like GLD to see which ones rise to the top. The period of time I ran the back test on was from 2007 – 2011. I figured I would view results both short and long and wanted to include the steep 2008 drop in markets as the remarkable 2009 recovery in my analysis.

You would think that an intermediate paced trend following system would do the best, given the steep trends included in the analysis. The results were, I must admit, surprising to say the least. Top of the list consistently was a Contrarian system that I have always been very suspicious of. It is one that goes against the grain of what I like to do. Normally I want to catch a nice trend and follow it to the end.

The contrarian system I have looks for turning points and presumptuously make you take the trade in the opposite direction. At that point GLD could be dropping quickly and the system says go long. It is a system that truly pushes you to buy low and sell high. And if the trade goes wrong, it quickly tells you to exit. Obviously this system could be quite painful to implement in a long and sustained trending market as you would miss much of the long move and would keep trying to trade against the market direction. Sounds like a bad system. Yet the results are surprisingly better than the best

 Test period:  1/3/2007-2/25/2011   1514 days

System                                     Avg Profit Points       Trades   Wins  Losses  Contrarian                                            104                  73          35      38      
72 Simple Mov Avg                               17                   60          23     37

MACD9                                                 5                    80          33     47                   

The above table compares the Contrarian approach with two standard methods. The first is a trend following approach where you go long when the price is above the 72 SMA. The second is the traditional MACD (Moving Average Convergence Diveregence) approach and going long when the MACD crosses its 9 moving average line. Amazingly the Contrarian approach leaves them in the dust.  The 104 points is roughly 130% profit over the 4.25 years as the average price of GLD during that period would be around 80. The points are essential compared to the average price. I expect I would trade this in both long and short direction using options or my dynamic hedge system. 

I think I will have to take a closer look at this system and thoroughly verify these results before I commit my money into it. But it sure looks promising  This is what I enjoy - testing, back testing various methods and narrowing it down to what I want to follow and then using it to manage my portfolio.

Here is the chart of GLD with the Contrarian system applied to it. There are long buy signals with an Up arrow, Short signals with a Down arrow and Exit signals on long and short with a box around it.