Stock Option Backtester The Technical Trigger to Find Bullish Bursts in Advanced Micro Devices
Date Published: 2019-01-31
DisclaimerThe results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
LedeToday we demonstrate the technical conditions that, when met, have provided a strong bullish trigger for AMD.
PrefaceRecently we wrote on other technical set-ups:
* The Exact Bearish Trigger in Nvidia.
* The Technical Trigger to Find Bullish Bursts in Nvidia.
* The Exact Bearish Trigger in Netflix.
* The Exact Bullish Trigger in Amazon, Even During a Bear Market.
* When a Bearish Trigger Starts in Alibaba
There is a technical set up such that it triggers bullish times to trade Advanced Micro Devices, even in a bear market, that has shown triple digit returns through 2018, and quadruple digit returns (1593%) over the last three-years.
Finding these patterns should be straight forward. And with the upgraded Trade Machine, which is now a stock backtester as well as an option back-tester, now they are.
The Short-term Bullish Option Trade in Advanced Micro DevicesWe will examine the outcome of going long an out-of-the-money (strike price is set to the 40 delta) call option, in options that are the closest to 14-days from expiration. But we follow three rules:
* Never Trade Earnings
Let's not worry about stock direction or earnings, let's try to find a back-test that benefits from volatility. Here it is, first, we enter the long call.
* Use a technical trigger to start the trade, if and only if these specific items are met. As of this writing, 1-31-2019, the conditions are not yet satisfied.
Wait until the day that the stock price crosses above the 10-day moving average (DMA) and the stock price is also above the 200 DMA. Finally, to prevent a trigger during an overbought period, we set the RSI (using 20-days) below 70. Here is a nice simple image of the technical requirement:
You can set an alert in Trade Machine®, which will track all of these moving parts for you, and message you when it triggers. In fact, you can do this with a portfolio of stocks for a portfolio of bullish and bearish triggers. let Trade Machine do the work for you -- there's no need to stare at the screen.
* Finally, we set a very specific type of limit:
* Use a 20% limit and a 40% stop.
At the end of each day, the back-tester checks to see if the long call is up 20% or down 40%. If it is, it closes the position.
RESULTS FROM THE OPTION BACKTESTERHere are the results over the last three-years in Advanced Micro Devices. You can see the exact set-up to replicate it in Trade Machine by tapping this link.
The mechanics of the TradeMachine® Stock Option Backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
Setting ExpectationsWhile this strategy had an overall return of 1593%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 33.8%.
➡ The average percent return per winning trade was 68.8%.
➡ The average percent return per losing trade was -48.6%.
Why Are the Averages Different Than the Stops and Limits?
The average win and loss are larger in absolute value than the stops and limits for two reasons:
First, the backtester uses end of data to maintain a strict structured rule based system. So the stops and limits won't be exact.
Second, and perhaps the bigger impact, is the fact that stocks gap from one day to the next (from close to open) and that can move the profit and loss well past the stop and limit setting. (That's how real life trading works, not hypothetical.)
Checking the Moving AverageYou can check moving averages for AMD on the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Advanced Micro DevicesNow we can look at the six-months from 2018-07-01 through 2018-12-31. AMD stock was up 17.5% during that time period, but getting bullish at the right times was unscathed:
WHAT HAPPENED: Option BacktesterTrade beyond luck.
Tap here to see it for yourself
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.