Short on Stock Indexes: 2 Strategies to Exploit the Downtrends in Nasdaq and S&P500

by Andrea Unger

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For years, stock indexes have had an underlying bullish trend that pushes many traders to use strategies that work mainly on the long side. Indeed, having systems in the portfolio that work both long and short on these markets can be very useful.

Proof of this is the two long-short strategies shown in this video. These are two systems in our portfolio that have succeeded in taking advantage of the bearish movements of the Nasdaq and S&P 500 making excellent profits.

By watching this video you'll learn about:

- The rules of our trend-following strategy on the Nasdaq

- The rules of our bias strategy on the Mini S&P 500

- The real performance of these strategies in the last period 

 

Enjoy the video! 

Transcription

Hey everyone! One of the coaches of  Unger Academy here and welcome back to our usual chat about the strategies of our portfolio that have performed the best over the last period.

Okay, so this week we're going to be talking about two futures that aroused great interest last week, namely the Nasdaq and the S&P 500, which replicate the corresponding stock indexes. And as many of you probably already know, the Federal Reserve, which is the central bank of the United States, held a meeting on Wednesday.

These markets initially rose and then, according to what we can call a typical "Fed pattern", the day after the interest rate increase was announced, they dropped sharply. So this happened both on the Nasdaq, as we can see above, and on the S&P 500, also because these markets are closely correlated with one another. In fact, we can say that they have a correlation degree that is higher than 75%.

What we're going to show to you today are two strategies that demonstrate how trading systems can react to adverse market conditions. 

As you know, in the last month, these two markets have gone down even in an aggressive way at times. As I was telling you before, the S&P 500 dropped considerably the day after the interest rate release by the Fed. I mean, it had a range from high to low of around 200 points, which corresponds to a counter value of around 5% of the current value of the S&P 500. So it is pretty clear that there was a sharp increase in volatility, so we really need to be very careful.

However, having automated strategies that can also trade with short positions can help us take advantage of this extreme volatility of the market.

But let's start and take a look at the first strategy I want to show you today, which is on Nasdaq. It's a long-short strategy of the multiday type, although it may not seem so if we look at the last period, where the positions were always closed a few bars after the entry. However, this happens because they hit the profit target, which is set at $3,000. So if we look at these very extended bars it may seem like we earned very little, while actually we made $3,000 every time.

This future has become increasingly heavy over time but there is also a Micro contract which is very liquid and also very scalable, so from that perspective, there is no problem at all.

As we said before, this is a trend-following strategy. Here are the long trades as well. The stop loss is set at $1,300. But now let's take a look at the trigger, so the entry-level on which we're going to place our orders. We've said that this is a trend-following strategy, so we're going, as far as the long side is concerned, to subtract from the high of the previous day several points. They are about 10-20 points, just to give you an idea of the values that you can use to optimize this input.

While as for the short side, we're going to take the low of the previous day and add 35 points to it. So we get a sort of an estimate of what should be the low or the high of the previous day. But why do we do so? Well, basically to try and take advantage of a better entry price compared to the standard high and low of the previous day.

This strategy was developed in 2018. About this time, I'd say. Right about here. And as you can see, in the out-of-sample period it performed very well.

What I'd like to show you are the two separate equity curves. Here is the long curve, which certainly brought benefits to the strategy. And here is the curve of the short trades, which shows how in the last period, and especially in the out-of-sample period, the strategy has made a series of very profitable trades. This indicates that perhaps the Nasdaq, but also other stock indexes, could respond very well to trend-following strategies, especially on the short side.

Now let's move on to the next strategy that I'd like to show you today. It's a bias strategy that most of you probably already know, since we've already talked about it in our past videos. It makes both long and short entries and it's based on a bias approach. And I’m repeating this for those who haven't seen the previous episodes or have just started to follow us.

The system goes long on Monday evening, that is, at the end of the first session. You can see it here, at the close of the last bar of the first session of the week. And then the long position is closed on Thursday evening, so at the last bar of Thursday. Then the system will go short on Friday.

Thanks to this feature, namely the fact of being a long-short strategy, it has been able to perform pretty well even in this period of sharp falls.

Just take a look at this short entry. Last Friday also was characterized by a good short trade. And overall if we go and look at the equity line of the short trades from 2008... This strategy was developed in 2017. So, let's just take a look.

We can see that it didn't shine in the in-sample period. It had arrived approximately at this point, and then it has continued performing more or less in the same way also in the out-of-sample period.

But we know that the S&P 500 has really risen a lot over the years, which means that getting good short trades isn't that simple at all. And that's why we're happy with this equity line of the short trades, because we can see that when the market falls remarkably, as it happened in the last period, this type of strategy can make short entries and help us to balance our portfolio.

This is the total equity line of the strategy, which we developed five years ago in 2017, so around that point there. And you can see that it has also continued performing quite well in the out-of-sample period.

So, guys, give it a try, too. These simple ideas are very easy to develop and use if you have a method and if you know how to handle these things.

So, if you are interested in the world of systematic trading, I suggest that you click on the link in the description of this video. From there you can watch a free presentation of Andrea Unger, our founder and the only 4-time World Trading Champion, or get our best-selling book covering only the shipping costs, or even book a free call with a member of our team.

If you liked the video, please leave us a Like, subscribe to our channel and click on the notification bell to stay updated on the release of all our new videos.

And with that, this video is over! And we will see you soon in our next one, bye-bye!

Need More Help? Book Your FREE Strategy Session With Our Team Today!

We’ll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.

BOOK YOUR FREE STRATEGY SESSION NOW >>

Andrea Unger

Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.

I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems. 

In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.

Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.

Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.