Inspirations

The basis of the strategy is the IBS (Internal Bar Strength) indicator, used during strong uptrends. The strategy includes very effective and simple rules for opening and closing positions.

Key components

• Strong momentum. The essence of this strategy is the ability to detect a specific setup occurring during uptrends.

• IBS as a second factor. Internal Bar Strength is an important element of the Momentum IBS strategy. It helps identify patterns leading to price reversals and finds potential reversal points.

• Trading using Stockpicker method on 3 ETFs - SPY, QQQ, and VNQ.

The strategy includes two entry rules and one exit rule and time Exit as alternative.

Backtest 1, Fixed $ Money Management

In this variant, we are consistently investing the same amount of $100k, which is divided by the maximum number of open positions (3). This results in a capital commitment of up to $33.33k per position.

We are testing the period of the last 30 years, covering years from 1994 to May 2024. The backtest automatically selects ETFs that meet the criteria from the S&P 500 index.

• Invested capital: $100k

• Maximum number of open positions: 3

• Maximum investment per single position: $33.33k

• Test period (years): 30

• Tested years: 01.1994-07.2024

• Tested instrument: Group 3 ETFs (SPY, QQQ, and VNQ)
  

Equity chart for this test:

Basic statistics and results month by month:

Backtest 2, % Money Management

In this backtest, we invest in a strategy that constantly uses 100% of the current capital (with an initial capital of $100k). This means that as the capital grows or decreases, the position value changes proportionally. The rest of the parameters remain unchanged.

The Equity Chart for this test looks as follows:

The benchmark (SPY) is shown in yellow.

Basic statistics resulting from the test:

Evaluation of Net Profit and CAGR

The net profit above $320'000 in the analyzed period is much lower than the benchmark (S&P 500 Index in the form of SPY ETF marked on the chart in yellow), which is above $1,894,000. This translates to a CAGR of 4.91% vs 10.5%. This means that the analyzed strategy achieved lower net profit and a lower average annual return.

Drawdown and Return/Drawdown Ratio

The max drawdown in the analyzed strategy was only 4% vs 55.19% in the benchmark, which also gives a significantly better Return/Drawdown ratio for the strategy, namely 26.4 vs 4.4. This means that despite much lower profits, the analyzed strategy is also significantly less risky and more stable.

Exposure

The average exposure in the analyzed strategy was only 16.57% compared to 100% in the benchmark.

Exposure is measured by a dedicated study, which you can read about here.

Here are the details of the study:

In the above chart, over 30 years of history, there are 3 moments when exposure exceeds the entire capital of 100k. How is this possible when the strategy should always divide the capital among a maximum of 3 instruments and never exceed the allocated 100k? This is a rare case when the strategy had a signal to close a position on the same day as another signal to open a position on the same instrument. Therefore, in statistics, this transaction accumulated, which should not have an impact on real trading.

In summary, very low exposure is a strong point of the strategy and makes it suitable for use in a portfolio with others. If we were to use the Annualized return indicator, the original 4.91% CAGR would convert to approximately 29% because the same capital could theoretically be used 6 times by different strategies with a similar profile.

Winning Percent

The winning percentage in the analyzed strategy was 71%. This means that we have a overwhelming number of winning trades, highlighting the effectiveness of the strategy in generating positive results, giving us a high level of comfort in terms of the frequency of profit generation.

At the same time, Avg. Win is only slightly worse than Avg. Loss, which combined with Winrate makes the strategy very effective.

SL & TP

The strategy does not use typical stop-loss and take profit orders. According to our tests, for most stock strategies, these settings worsen results (see why). Instead, the strategy has a safety exit after X bars (time-based stop-loss). Diversification of positions within the strategy's portfolio serves as protection against the strong impact of a potential price change in a single stock on the entire portfolio.

Market Regime

The strategy has been tested in all major market regimes and includes filters implemented based on this. Learn more about market regime.

Trading Costs

Trading costs and slippage were taken into account in backtests, which occurred in real account tests for the Alpaca broker (detailed study). With a diversified stock portfolio and strategy, transaction costs can determine your profit or loss, so take the time to thoroughly test and choose a broker.

Strategy Robustness

The strategy has 850 signals for three ETFs it was created for. Simple two entry rules and two alternative exit rules provide it with high robustness.

Additionally, we tested the robustness by conducting nearly 300'000 trades (max open positions 100) for the period from 1994-2024 for all index stocks Nasdaq100, S&P500 Russel1000 with %MM.

The results are as follows:

As can be seen, the strategy performed the weakest on small companies included in the Russell 1000, therefore, and also due to high spreads and slippage, they are not recommended.

This strategy has passed our manual parameter modification tests. We adhere to the principle that the fewer parameters, the greater the strategy's robustness. Therefore, we make efforts to ensure that our strategies have as few parameters as possible and to only select parameters that have a significant impact on the strategy's effectiveness while also aligning with its character.

Recommended Instruments

The recommended primary instrument for this strategy in Algocloud Stockpicker is a group of 3 ETFs (SPY, QQQ, VNQ). They have very good historical results despite trading relatively infrequently.

Pattern Day Trader

Historically, the strategy did not have any transactions that met the PDT criteria, so it can be successfully used on small accounts as well. You can read more about PDT here.

Summary & Strengths and Weaknesses of the Strategy

Strengths of the strategy:

• Low exposure: the main advantage of this strategy is the very low capital utilization (average of 16.5%), making it suitable for incorporation into other more frequently traded strategies.

• Low correlation: this gives us a unique strategy profile.

• Very Low Drawdown: The Max Drawdown in the analyzed strategy was only 4% compared to 55.19% in the Benchmark, giving an impressive Ret/DD ratio of 26. This shows that the strategy was very low risk in relation to gains.

• High Winning Percent ratio: 71% of trades ended in profit, highlighting the effectiveness of the strategy and increasing comfort in its use.

• Any account size: Ability to use on accounts of any size, due to the lack of restrictions related to PDT.

  
  

Weaknesses of the strategy:

• Low overall profitability: the strategy is not a major driver of the portfolio in terms of generated profits, unless more capital is allocated to it, which has the potential given its profile.
  

Summary

Momentum IBS is a strategy with low exposure and an impressive 71% win rate, making it an attractive complement to a diversified investment portfolio. By focusing on three ETFs - SPY, QQQ, and VNQ - and employing a unique trading approach, it offers profit stability with limited risk, as evidenced by a maximum drawdown of only 4%. This strategy also stands out for its very simple entry and exit rules, translating into high resilience and effectiveness in various market conditions.

What you receive in the package for this strategy:

• E-book presenting detailed rules and results of the strategy.

• SQX file ready to use on platforms Algocloud and StrategyQuant.

• Pseudocode describing all rules in an easy-to-understand manner.

• IBS indicator for TradingView.
  

If you need the strategy code in formats: TradeStation (EasyLanguage), MultiCharts, MT4, or MT5 (MQL), please contact us regarding this matter.