May 16, 2020

IWM Long Day Trade Equity Backtest

spintwig.com Equities backtest, IWM/RUT, Long Day Trade 0

3 min read

In this post we’ll take a look at the backtest results of opening one IWM long day trade position each trading day from Jan 3 2007 through May 8 2020 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold IWM.

There are 15 backtests in this study evaluating over 13,400 IWM long day trade equity occurrences.

Let’s dive in!

Summary

Systematically day trading is an unprofitable strategy.

Systematically trading overnight outperforms buy/hold with regard to total return.

Methodology

Strategy Details

Symbol: IWM
Strategy: Day Trade (positions are held for 24 hours or less, ignoring weekends)
Days Till Expiration: N/A
Start Date: 2007-01-03
End Date: 2020-05-08
Positions opened per trade: 1
Entry Days: daily
Entry Signal: N/A
Timing: 9:00am ET and/or 4:00pm ET
Strategies
- Overnight (open position at market close and close at market open)
- Intraday (open position at market open and close at market close)
- Buy/Hold (open position at market open and close the following market open)
Trade Entry
- Mondays
- Tuesdays
- Wednesdays
- Thursdays
- Fridays
Trade Exit
- Mondays
- Tuesdays
- Wednesdays
- Thursdays
- Fridays

Assumptions

Margin requirements are always satisfied
Margin calls never occur
Margin requirement for all positions is 30%

Mechanics

Prices are in USD
Prices are nominal (not adjusted for inflation)
Commission to open or close positions is 0.00 USD
Slippage is calculated according to the slippage table
For comprehensive details, visit the methodology page

Results

Win Rate

Trading overnight outperformed with regard to win rate vs intraday or buy/hold.

Day trades with a Friday exit yielded the greatest win rate.

Average Win

Buy and hold outperformed with regard to average win magnitude vs overnight or intraday.

Day trades with a Tuesday exit had the greatest average win magnitude.

Lose Rate

Trading overnight outperformed with regard to lose rate vs intraday or buy/hold.

Day trades with a Friday exit had the lowest loss rate.

Average Loss

Trading overnight outperformed with regard to lose rate vs intraday or buy/hold.

Day trades with a Tuesday exit had the lowest average loss magnitude.

Compound Annual Growth Rate

Trading overnight outperformed with regard to geometric return vs intraday or buy/hold.

Day trades with a Friday exit outperformed exiting on other days.

Annual Volatility

Trading overnight outperformed with regard to annual volatility vs intraday or buy/hold.

Day trades with a Thursday exit had the lowest volatility.

Sharpe Ratio

Trading overnight outperformed with regard to risk-adjusted returns vs intraday or buy/hold.

Day trades with a Tuesday exit had the highest sharpe ratio.

Max Drawdwn

Overnight outperformed with regard to max drawdown vs intraday or buy/hold.

Day trades with a Tuesday exit had the softest max drawdown.

Max Drawdown Duration

Overnight outperformed with regard to max drawdown days vs intraday or buy/hold.

7 of 15 strategies failed to reach a new high after their largest drawdown

Monthly Returns

Overnight outperformed with regard to average monthly returns vs intraday or buy/hold.

Day trades with a Tuesday exit had the greatest average monthly returns.

Total P/L

Trading overnight outperformed with regard to total return vs intraday or buy/hold.

Day trades with a Tuesday exit had the greatest total P/L.

Overall

Profitability of various day trading strategies had mixed results.

Day trading overnight outperformed over the duration of the backtest.

Kurtosis

Daily returns were binned in 25 basis point (bp) increments and charted against a gaussian (normal) distribution. As mentioned in the SPY day trading posts here and here, the stock market distribution curve more accurately aligns with a laplace distribution vs a normal distribution.

Discussion

Opening a position at the Monday morning bell and closing it at the Tuesday morning bell outperforms a total return buy/hold strategy by 1.6% with nearly 86% less time in the market.

The mantra of buy and hold investors is: “time in the market beats timing the market.” It appears there may be some exceptions.

The challenge is that the exception works until it doesn’t. Meanwhile, it’s not possible to discern when it’s no longer working until relative losses have been discovered by backtesting / looking in the rearview mirror.

We can actually see this exception in action. Take a look at the Tuesday buy/hold strategy on the equity curve graph in the section above. It experiences massive outperformance but then stalls early 2014, trending flat-to-down for the next 6 years.

Around the time of the stall the Tuesday overnight strategy begins to trend upward.