S

Back testing strategies on NFLX

and Nasdaq

BY:Mitchel D Fahey

What is Back Testing?

-Back Testing is an important investigation of the history of a particular equity, index, commodity or asset class.

It is a way of doing very in depth research into the history of how an underlying security trades with regards to parameters that a user sets up

You take historical data by: daily prices, weekly prices, or monthly prices. You then go back as far as possible and get the actual data for the underlying security that one would want to trade or test.

The user then picks key metrics that they want to test for. The user may use simple moving averages such as: 20-day, 50-day, 200-day simple moving averages, or exponential moving averages. Then you test these ranges in a data series using excel or through a computer programming algorithm.

Why is it Important and Pros and Cons of doing it

We need to see how the underlying security performs in different economic scenarios as new ones are always arising and business cycles are always going to: start, end, or currently going on.

We need to understand how geo politics, currency issues, commodity prices and a whole bunch of other factors has had an impact on the underlying security throughout all of history. If back testing is not done we will have no idea, at all, on how the security may react to these scenarios going into the future.

PROS

It will provide a general sense of price reaction history in the underlying security when economical factors or political factors present themselves

It allows investors the chance to come up with a theory or trading strategy that they believe will be successful and actually map it out to see if it worked in the past, which may give some encouragement to go ahead with the strategy.

CONS

Even though a strategy may work well in a back testing model does not mean, in any circumstances, that it will for sure work in the future. There are no repeat days or exact same circumstances in the market, so an entry and exit strategy should be well thought out before going forward with any trading strategy.

MUST be careful not to fit historical data to justify parameters, MAY want to have parameters in place first

Back Testing NFLX

Buy open and sell close for its history

Would have made a return of around 89%

Very good and still missing some key ups and (downs) from after market and pre market

3 570 11371704227128380

1,000

2,000

3,000

4,000

5,000

6,000

7,000

NFLX Investing $1,000

Series1

$$$

Back Testing NFLX

NFLX investing on Thursday

NFLX Investing on Monday

Monda

y

Tues

day

Wed

nesd

ay

Thur

sday

Frid

ay

-100

-50

0

50

100

150

200

Series1

NFLX Backtesting

Found that Investing $1,000 on a specific day, Friday was the worst as we would end up with $244.13

Investing on Thursday vastly was superior to all others where we would end up with $12,220 vs just investing in NFLX with this pattern would yield us around $5,1601 83 165247329411493575

0500

1,0001,500

NFLX Investing on Friday

Series1

$$$$

3 570 11371704227128380

2,000

4,000

6,000

NFLX Investing $1,000

Series1

$$$

1 75 1492232973714455195930

4,000

8,000

12,000

NFLX investing on Thursday

Series1

$$$$

More on NFLX

Thursday was the only day that actually out performed NFLX just buying open and selling close every day.

Every other day did much worse and two of the days we would have lost a lot of our investment

Nasdaq

By above 20 day SMA, short below 20

day SMABuy and hold the

index

11 162132314841645180619671$0.00

$500,000.00

$1,000,000.00

$1,500,000.00

$2,000,000.00

$2,500,000.00

$3,000,000.00

$3,500,000.00

$4,000,000.00

$4,500,000.00

$5,000,000.00

20 Day SMA

20 Day SMA

11 1414281742205623702684299832$0.00

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

Buy Index

Buy Index

More on 20 day

Total Profit of $2,472,178 vs $49,077

Geomean Return of 19.3% vs 9.3 %

Max drawdown of 47.1% vs 78%

6,145 Winning Trades, 4,980 losing trades

Biggest loss of -$479,052

Biggest gain of 346,933

11 162132314841645180619671$0.00

$500,000.00

$1,000,000.00

$1,500,000.00

$2,000,000.00

$2,500,000.00

$3,000,000.00

$3,500,000.00

$4,000,000.00

$4,500,000.00

$5,000,000.00

20 Day SMA

20 Day SMA

Nasdaq 20 Day EMA Back test

Total Profit = $2,391,264.84

Max Drawdown= 51%

Geo Return= 19.2%

Winning Trades= 6,143

Losing Trades=4,982

Biggest losing Trade= -$476,264,31

Biggest Winning Trade= $349,032.72

11 1621 3231 4841 6451 8061 9671$0.00

$1,000,000.00

$2,000,000.00

$3,000,000.00

$4,000,000.00

$5,000,000.00

$6,000,000.00

20 Day EMA

20 Day EMA

Nasdaq 20 Day EMA/SMA

Profit = $31,245.65

Yes Trades= 5913

No Trades= 5212 This is a lot higher than two

previous

Max drawdown of 56%

Geo Return=8.2% - lower than just Long Nasdaq

Losing trade = -$6,317.65

Winning Trade= $ 4,772.34

11 2242447367048935$0.00

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

$70,000.00

20-Day EMA/20-Day SMA

20-Day EMA/20-Day SMA

Nasdaq-By 50 Day, Sell on Close when 200 Day

crosses above

Total profit = $501,471.79

Winning Trades= 5,400

Losing Trades= 3,504 Lowest number of losing trades of all

models tested

No Change = 2,042

Maximum Drawdown=20% Lowest of all tested

Geomean Return=15.3%

Biggest losing trade= -$915.82

Largest winning trade= $1,208.44

11 1837 3663 5489 7315 9141$0.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

50/200-day MA

200-day MA

Nasdaq Summary

Buy and hold

Biggest Loss= -$3,554.90

Biggest Gain= $3,248.30

Drawdown=-78%

Return=9.3%

Best from back testing

50-day/200-day strategy drawdown =-20%

20-day SMA Return= 19.3%

Total Profit = $2,472,178 from 20 day SMA

Lowest Return = 20 day EMA/20 day SMA 8.5% lower than buy and hold

Nasdaq Summary

I learned that back testing and following a moving average can pay off in a big way

Having a simple strategy such as going long 20 day SMA, and shorting below level paid off in a HUGE way

All strategies avoided as big of a drawdown as Buy and Hold

Having more signals that are closer together does NOT necessarily give better return 20 Day EMA/SMA provided

lower return than buy and hold and would have to pay comissions

The 50 Day/200 Day strategy gave us a low drawdown and big return and would have had to make less trades

Different Strategies for Hedge Funds

Equity Long-Short Hedge Funds take both

long and short positions in equities and etf’s

This is the most common type of hedge fund

Jim Cramer of Cramer-Berkowitz and Doug Kass of Seabreeze partners.

Short Only Hedge funds Not as popular, only focused on

securities that are believed to be overvalued

Jim Chanos of Kynikos Associates Claims they manage $1 Billion

and they dig through financials to find

Companies that materially overstate earnings

Unsustainable or operationally flawed business plan

Engaged in outright fraud.

More Hedge Fund Strategies

Activist Hedge Fund Manager

Buy big stake in a company and force management to appoint board members that will be share holder friendly

Becoming more popular

Carl Ichan, David Einhorn, Bill Ackmen

Usually involves trying to get company to do buybacks or increase dividends

Also mergers and sales.

Fixed Income- Bill Gross, trading bonds from around the world