Trading System #2–Consecutive Directional Close (Part 1)

The next strategy I wish to develop is based on Rule 2 in Larry Connors’ 2009 book Short Term Trading Strategies That Work.

For lack of a better name, I am calling this the “Consecutive Directional Close Trading System.”  If you come up with something more catchy then please pass it along.

Connors’ claim is as follows:

> From 1995-2007, after the SPX has dropped three days in a row, it has risen more
> than 4 times its average weekly gain over the next five trading days.
>
> And, after the SPX has risen three days in a row, it has on average lost money over
> the next five trading days.

Two system variables jump out at me immediately.  The first variable to test is number of consecutive closes in the same direction (e.g. up or down).  The second variable to test is number of days to hold the trade.  In thinking back to the SPY VIX trading system, I will test {3, 4, 5, 6, 7} for both variables.  This will give me 25 sets of results to study.

SPY is one of many tickers I can imagine using to test this system.  I could also test other broad-based US indices like QQQ and IWM.  I could also test international ETFs and other asset classes.  I could also test SPX-inclusive stocks in order to generate a more complete distribution of trades.

In my next post, I will start testing this system on SPY.