How to Make More Money – Possibly

This article is a follow up to article How to Make Money – Perhaps which you need to read first for this article to make any sense. I decided to take the historical data for the Dow Jones Industrial Average over the last 30 years and apply the same analysis as I did for the FTSE100 in the previous article. The following is a chart of the Dow Jones over this period.

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The results for each of the 10 scenarios from the original article are shown below. Please note that everything that follows is my own personal analysis and interpretation of the publically available historical data of the performance of the index. I cannot be held responsible for any profits or losses you might make if you follow my conclusions to generate your own trading patterns.

Scenario 1 – Opposite Direction Bet

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Scenario 2 – Same Direction Bet

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Scenario 3 – 2 days before Opposite Direction Bet

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Scenario 4 – 2 days before Same Direction Bet

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Scenario 5 – 3 days before Opposite Direction Bet

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Scenario 6 – 3 days before Same Direction Bet

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Scenario 7 – 4 days before Opposite Direction Bet

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Scenario 8 – 4 days before Same Direction Bet

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Scenario 9 – 5 days before Opposite Direction Bet

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Scenario 10 – 5 days before Same Direction Bet

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Conclusions

I was not surprised to see that the graphs for Scenario 1 and Scenario 2 are quite similar to the same scenarios on the FTSE100 index. The charts of the Dow and the FTSE over the last 30 years are in many ways quite similar, and we are also used to seeing the up or down direction of the index on any particular day being the same on both sides of the Atlantic. Betting that the Dow Jones index will move in the opposite direction to the previous day has been a good strategy since around the turn of the century, the same as we see for the FTSE100 index.

What is far more surprising to me are Scenario 3 and Scenario 5. These are both highly favourable betting on the FTSE100, with profits only really showing after about 1999 but minimal losses before that. But both strategies are very poor on the Dow Jones. Scenario 3 is better than Scenario 5 for the Dow Jones data, although the period since 2009 has been quite destructive with this strategy. Scenario 5 was particularly destructive in the period from 2000 to 2009. This is interesting because this is the same period in which Scenario 5 shows its best gains on the FTSE100.

These sharply contrasting results leave me more doubtful about pursuing the Scenario 5 strategy on the FTSE100 index. I can think of no good reason why the Dow Jones and the FTSE100 should behave in such completely opposite ways, and so I have to doubt the validity of the system.

The results do, on the other hand, add weight to the idea that Scenario 1 (the simple approach of betting the index will move in opposite directions from session to session) could be a good strategy to follow. It has yielded good results on both sides of the Atlantic over the last 15 years. I have a rational explanation for this which is that it relates to increased volatility resulting from computer trading activities and trading by private individuals, both of which took off around the turn of the century.

Another possibility

All the strategies described thus far in this article and the previous article are a way of selecting a spread bet to place every day based on performance in previous days. I have now also investigated a simple system that can be used where a bet is not placed every single day, but only when the conditions are right. The idea is again simple enough – after a run of several days where the index has moved in one direction, it is likely to move in the opposite direction the next day. I tried this out waiting for 2,3,4 or 5 consecutive days of motion in the same direction. Again it was a very simple tweak to the program to be able to do this.

I won’t bore you with all the results, suffice it to say that the best results are obtained by waiting for the index to move in the same direction for 3 consecutive days, and then placing a bet in the opposite direction. You keep the bet open until the index really does move in the opposite direction (even if this takes more than 1 session).

The results for the FTSE100 index are shown here.

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Here are the results for the Dow Jones.

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As you can see it works well on both sides of the Atlantic and we see a steady progression of winnings over the period since 2000 with minimal losses before that. I will conceded that performance has been a bit ordinary in the last 4 years however.

I have my new City Index Spread Betting Account and a very helpful man from the company phoned me up today to talk me through some of the features of their platform, and to get me started. I have decided that this strategy of betting against the trend of the last 3 days is the safest, even though it may not make money as quickly as for example Scenario 1. So it will be this strategy that I try out with my new spread betting account.


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