In Part I of this series two systems, DMS Long Only and DMS Long&Short, demonstrated the advantages of momentum trading. Momentum trading has long been a favorite of investors and traders. Dynamic momentum trading, a concept that enables momentum measures to adjust to market conditions, is new and more sophisticated.

Applying dynamic momentum trading to a portfolio consisting of 45 ETFs amazing backtest results were achieved. Using ten years of data results were shown for twenty-four different trading combinations. The worst of these exceeded an S&P 500 buy and hold strategy by three times. The best of these did so in excess of twenty times.

Bull and bear , symbolic beasts of market trend

This article will explore the results of one of these tests in detail. Its purpose is to enable the reader to better understand system mechanics and the trading cycle. The trading model to be used in this review is the DMS Long Only with Normal Trading Style andOne Trade per month.

Trade History

DMS Long Only with Normal Trading Style and one trade per month showed a ten-year profit of $115,658:

Note: The figure from this table differs slightly with the final one below. This article was written a day or two after the first one reflecting a day or two more data in the following table.

Individual Monthly Trades

The trades that produced the $115,000 backtest profit are detailed. The first trade took place on July 6, 2007. The table is current through close of markets on December 2, 2016.

For each trade, the entry and exit dates are shown as are the corresponding entry and exit prices. The cumulative profit represents total profit as of that date. The beginning equity was $10,000 and all equity is invested in the next trade.

Another Note: The monthly profit/loss percentage shown in Part I of the previous article should not equal the percentages above. The above table reflects profits per trade. The previous one, profits per month. Because trades are weekly and not monthly, only coincidentally would four weeks coincide with the monthly calendar.

The above table is cumbersome but allows one to visualize the route that the system took to get to its total profit. It is useful to get a sense of variability in individual trades results. An amazingly good (or lucky, if you prefer) trade was entered into on 4/1/2016 when GDXJ was selected. A bad trade was the SLV trade in June of 2009. Looking down the profit percentage per trade column will spot other good and bad trades.

What Signals a Trade?

Trades are signaled by two factors: trade-days and momentum rankings.

A trade-day occurs once per month, always on the last Friday of the month.

Momentum rankings can be calculated at the end of each week via the proprietary dynamic momentum system. For purpose of backtesting, only the rankings on the last Friday of each month trigger a new trade.

Trades are opened/closed at the open price on the following Monday. The table below shows rankings for the last five trade days. Rankings shown include more ETFs than traded.

SOME RECENT RANKINGS

The system reviewed takes only one trade per month and trades long only. Thus, the highest ranked ETF (the one ranked number 1) is entered on each trade day. Other ranks are redundant and shown for informational purposes.

Were a user trading long twice per month, trades ranked 1 and 2 would be entered.

The worst-ranked ETFs, those ranked 41 – 45, would be used if one were interested in shorting poor performers. Number 45 would be the preferred selection.

Avoid this Confusion: All trades occur on Monday morning at the opening. All dates in the above tables are at the close of weekly bars, always a Friday. Ranking dates are based on Fridays. Entry dates are the following Monday. Confusion sometimes occurs because of the trade date. The trade date reported is the end of the next trading bar (a Friday). Even though the closing date of the bar is shown, price entry occurs at the open of that bar (a Monday).

To illustrate, XLF was selected based on Friday data as of 11/25. It shows in the trade table dated 12/2, seeming to leave a gap between the signal to buy and the actual buy. The price at which the trade was entered however was the opening price on Monday November 28 which was 22.25. Utilizing weekly instead of daily bars causes this confusion.

Mid-month rankings might be useful as a monitor to rankings shifts. Typically this kind of attention is unnecessary. Using this information to trade on is not recommended. Backtest results are not nearly as good while the number of trades double. It is possible that holding for longer than a month provides improvement. That possibility has not yet been backtested.

Part III in this series deals with the profit-time profile of trades.