I knew a fund manager some years ago who used this simple price action anomaly to trade for customer accounts. I used to stop by his office after work and there he was calculating the signals for this anomaly using a hand calculator. He made a good living and profits for his clients trading this simple strategy.
Besides using a simple and robust anomaly during that time, this trader I knew was highly disciplined. He was much older than me and probably he had already leant his lessons. Using a trading method is not nearly enough; the trader must be disciplined to follow the signals while having a solid plan for abandoning the strategy when it shows signs of deterioration and before it is too late.
Many traders do not realize that all it often takes to succeed is discovering and using appropriately one price action anomaly in a timeframe of interest. However, discovering an anomaly and actually trading it is not always an easy task and it takes hard work and devotion. These realities push many to trade in discretionary mode based on news, analysis, tips, sentiment, etc., but that usually results in random trading and eventually losses due to high variability of returns. As losses accumulate the harder it becomes to recover: a 20% loss requires a 25% gain to recover but a 50% loss requires a 100% gain and recovery becomes virtually impossible. This is one reason that most hedge funds close shop after a 30% drawdown or about; equity recovering to previous highs is most likely impossible in the medium-term and no one wants to work in the longer-term without making any money.
Below is the description of this simple price action anomaly with impressive results in equity ETFs and even ES-mini futures year-to-date. Note that this anomaly has been in public domain for some time but in 2018 it started showing signs of deterioration and it took two years for it to recover to previous highs. Access to full article requires Premium Insights subscription.
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
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