Stock Option Backtester The Exact Trigger for a Technical Reversal into a Bullish Zone in Alphabet Google
Date Published: 2019-02-12
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.
PrefaceToday we look at a technical pattern called a "reversal" in Alphabet Google (NASDAQ:GOOGL), which is a fancy way of describing a time when a bearish trend reverses into a bullish trend.
Recently we wrote on other technical set-ups. We look into both bullish and bearish triggers for one goal:
Build a portfolio of option set-ups, diversified not just by ticker, but by strategy. It's in this process that we expose the times were short bursts of risk exposure have been profitable in the past.
A portfolio of the same strategy in several stocks isn't really diversified, it's just the same risk taken over and over again.
* The Bearish Trigger in Twitter (TWTR).
* The Bearish Trigger in Micron (MU).
* The Bullish Trigger in Advanced Micro Devices (AMD).
* The Bearish Trigger in Alibaba (BABA).
* The Bearish Trigger in Nvidia (NVDA).
* The Bullish Trigger in Nvidia (NVDA).
* The Bearish Trigger in Netflix (NFLX).
* The Bullish Trigger in Amazon.
The Short-term Bullish Option Trade in Alphabet GoogleWe will examine the outcome of going long an at-the-money (strike price is set to the 50 delta) call option, in options that are the closest to 30-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, 1-25-2019, the conditions are not yet satisfied.
Wait until the day that the stock price crosses above the 21-day moving average (DMA) and is below the 10 DMA but above 50 DMA. Here is a nice simple image of the technical requirement:
The idea here is that:
* The stock has had recent weak momentum, that's why it is below its 10 DMA.
* At the same time, the stock is not in a technical breakdown -- that's where the stock being above the 50 DMA comes in.
* And, the stock has renewed (or reversed) its negative momentum -- that's where crossing over the 21 DMA comes in.
* Finally, we set a very specific type of limit:
* Use a 40% stop and limit
At the end of each day, the back-tester checks to see if the long call is up or down 40%. If it is, it closes the position.
RESULTS FROM THE OPTION BACKTESTERHere are the results over the last five-years in Alphabet Google using the options closest to 30 days from expiration and the 50 delta options (at the money options) as the strike price:
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 1781%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 39.7%.
Checking the Moving AverageYou can check moving averages for GOOGL on the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Alphabet GoogleNow we can look at two bear markets. First, We check the six-months from 2018-07-01 through 2018-12-31.
Here we get a comforting result: "The strategy did not result in any trades being placed. This is most likely because the trigger you were back testing did not take place during this backtest".
Perfect -- the reversal trigger did not fire when the stock was collapsing.
Next, we look at 2007-2009, the time that encompasses the Great Recession:
One More NoteIf this is truly a phenomenon we would like to investigate, it would be nice to see it work in similar stocks. It does, in fact. Trade Machine members, pull this back-test up (click the link right here), and see how AMZN, FB, and ROKU did.
WHAT HAPPENED: Option BacktesterTrade Machine gives you the capacity to trade 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.