Developing a Trading System for QQQ/NQ Part 2 – 12/31/12

This will be the last blog post for 2012 and although I feel compelled to write about the fiscal cliff, for a technical trader like me, it is just another piece of news and an opportunity for the many talking heads on TV to show their faces and argue. We need the higher earners to pay more taxes and we have to seriously cut spending. We cannot keep spending $1.50 for every $1.00 we earn! Perhaps that will be discussed in more serious detail when we need to increase the debt ceiling – which we have to. So enough said and let me move on to developing my trading system on QQQ/NQ.

After developing a shorter duration QQQ system I manually ran it through to see where the entries (shown by arrows) and exits (shown by X’s) would be on the first chart I had printed. I was originally looking in the 2009-2012 time frames. My intention is to start trading straight call and put options on these and later switch to futures on the NQ after I gain some confidence. I can trade the ETF QQQ which is what it is based on. I realize that futures on NQ and QQQ will differ; but by trading options on the Q’s I am using the same data.

My initial findings were very positive. I was showing somewhere between a 70-100% win rate and the losses were on average much less than the amount for an average win. Not bad….

I wrote down my rules for trading. First was the Long entry, and then the Long exit and next the Short Entry (using long Puts as I don’t want to short stocks or an ETF) and the Short Exit. Shown below are the entry exits for the time period 11/2011 to 12/2012, the most current data. It generated 100% wins over 15 trades and 13 months. Seems impossible but there it was! Realistically, I will take anything from 70% -100% wins, given that a typical trend following system only generates 30-60% win rate; except the average win is much higher than the average loss.

Next I printed charts of QQQ (not NQ as shown) from 2002 – 2012 where each page had about 18 months of data. I went to the first chart and applied my rules manually and saw where the entries and exits were. From 9/2001 to 2/2003, I had 19 trades of which 14 were winners. Also the losers were on average much less than the winners. I also noted that the worst consecutive losses were 2 in a row and the best consecutive wins were 6 in a row. I think I can live with that. Attached below is a scanned document of the 2002 QQQ (not NQ) chart and the indicators and entry exit points. It is somewhat weak and hard to see, and I apologize for that. It is a document that I will use to run the next several years of data through to see how it does under the same trading rules. Then it will be “Start your engines” for live trading!!!