Rowan Companies PLC (NYSE:RDC) : Technical Bullish Momentum Trade and Trigger
Date Published: 2019-03-15
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.
PrefaceTechnical analysis is the most common form of financial back-testing. It does, at every step, use historical patterns in order to extrapolate them into the future.
But at some point, the analysis has to be robust. One beautiful chart with lines that appear to work so well is not a rigorous backtest -- it's just one chart -- at one time. That's why technical analysis can feel so close to a profitable use case but at the same time the results never quite match up to the expectation.
After rigorous testing over the ten year period from 2009-2019 and the period from 2007-2009, which included the Great Recession, and over 100,000 back-tests, today we demonstrate the technical conditions that have provided a strong short-term bullish momentum trigger for Rowan Companies PLC (NYSE:RDC) , as well as, broadly speaking, the Nasdaq 100 index constituents.
OPTION BACKTESTER LOGIC WITH TECHNICAL ANALYSISThe goal is to create a portfolio of option trading backtests with alerts attached to them, so we don't have to stare at the screen all day, but rather use Trade Machine as the pattern recognition work horse to notify when the ideas become actionable.
Finding these patterns in Rowan Companies PLC 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 Bullish Option Trade with Technical Analysis and Moving Averages in Rowan Companies PLC (NYSE:RDC)We examine the result of a long 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 (using calendar days). But we follow three rules:
* Never Trade Earnings
Let's not worry about earnings. Here it is, first, we enter the long call.
* Use a technical analysis trigger to start the trade, if and only if these specific items are met.
* Trigger on the precise day that the stock crosses the 10-day exponential moving average (EMA) -- that's a trigger of momentum right at that moment.
* The stock is already above the 200-day simple moving average (SMA), which means that the stock is not in technical failure.
* The stock price is below the 50-day SMA means that it has room to run to the upside.
* The RSI (using 20-days) is below 70, so the stock isn't overbought.
Here it is in an image from Trade Machine -- only focus on the moving average and RSI settings where the filter is turned to "on.":
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 stop and limit:
* Use a 40% limit and a 60% stop.
At the end of each day, the back-tester checks to see if the long call option is up 40% or down 60%. If it is, it closes the position.
We leave more room on the stop side (larger stop than limit) from our discoveries in back-testing -- this was optimal and still led to far larger average winning trades by percent return than losing trades.
Stock Option Backtester With Technical Analysis ResultsHere are the results over the last two-years in Rowan Companies PLC:
The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
This is not a magic bullet, rather it's a bullish technical analysis momentum strategy predicated on using pattern recognition in charts through moving averages and RSI, rather than manually drawling lines stock by stock.
Setting ExpectationsWhile this strategy had an overall return of 218.2%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 61.15% for each 14-day period.
Checking the Moving AveragesYou can check to see the values of all the moving averages discussed above with real-time daily prices, including live after hours prices, for RDC by viewing the Pivot Points tab on www.CMLviz.com.
Rigor to the Option Backtester, Technical Analysis and BacktestingWe compared this technical analysis trigger on the constituents of the Nasdaq 100 versus the results from the baseline. The baseline is simply owning calls and rolling them every two-weeks with the same stop and limit as introduced above (40% / 60%). Here's what we found:
* Over one-year, the average trade return was 7% using this technical trigger compared to just 1% using rolling calls with no technical structure (baseline).
* Over 2-years, the average trade return was 18% using this technical trigger compared to just 6% for the baseline.
* Over 5-years, the average trade return was 11% using this technical trigger compared to just 4% for the baseline.
* Over 10-years, the average trade return was 8% using this technical trigger compared to just 4% for the baseline.
* And finally, from 2007-2009, the period that incorporates the Great Recession, the average trade return for a bullish trigger was positive 6% using this technical trigger compared to -3% (negative) for the baseline.
Even further, the win rates by stock were also higher, as were the average winning trade return. The details to this content are reserved for Trade Machine members. But you can rest assured that:
* Yes. We are empirical.
Technical Analysis Back-testing More Time Periods in Rowan Companies PLCNow we can look at just the last year as well:
We're now looking at 164.8% returns, on 2 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 79.89%.
Next StepsTap here to use pattern recognition. You can do this.
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.
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