AAPL OTW system show 26 consecutive winning trades (click to enlarge)
The OTW trade is a strategy that is part of a family of trading patterns that I call P2P, or Point to Point. That means the strategy opens a trade at a specific point in time and closes the trade at a specific future point in time. The premise of the strategy is that there are recurring market forces that make an impression upon a stock, that cause price to move in one direction or another, on average, between these points in time.
Typically such patterns happen on a weekly or monthly basis. There are intraday patterns, however the variance with intraday volatility makes intraday extremely difficult to find an edge over a long period of time. Weekly P2P patterns seem to be most prevalent. These patterns tend to work with a large number of stocks, but don’t seem to be effective with indexes or futures products. Some ETFs are receptive to the patterns.
There are two primary weekly patterns that I have found in a large number of stocks, some stocks have much greater impressions of the pattern over a long period of time. Apple happens to have one of the best impressions of P2P weeklies. Here are the two patterns that stand out the most with Apple, and these are two of the patterns that I have modeled in an automated trading system I use with my Apple Auto Trader subscription service:
OTW: This pattern holds over the weekend, and has a dramatic bullish bias. Price has a statistically significant acuity to rise from a specific point in time before the weekend, to a point in time soon after the weekend. For example, from Friday at 2:30 PM to Monday at 11:40 AM. Or even a P2P from Thursday to Tuesday. The Apple OTW trader uses a similar pattern.
WTF: No, this is not the popular expression of dismay, it is a bearish pattern that occurs from Wednesday to Friday. And it works by opening a Short position on Wednesday and closing it on Friday. The Apple IFE trader uses this pattern.
These P2P patterns work without the aid of any filters or Technical analysis, the patterns are found through exhaustive research over long periods of time using time series stock data. These P2P patterns seem to work best with stocks from companies that have been around for at least a decade or more, that have a relatively positive long term price appreciation.
Typically a good pattern does not require any kind of filter to work well. In fact the Apple Auto Traders, without any kind of filter, produce win rates in excess of 60 percent. However, the application of filters, such as a simple moving average, that filters out some potential trades if the short term trend is against the direction of the trade, can filter out as little as 10 percent of the trades, yet increase the win percentage to over 70 percent.
AAPL OTW 5 year Equity Curve
Other types of filters that seem to work well are Implied Volatility filters, where instances of the trade are filtered if the Implied Volatility ranking over a 52 week period does not reach a certain threshold. Again, it is typical to filter out just a small number of trades with this technique.
The systems that employ these P2P patterns don’t use Stop Loss mechanisms, except for extreme moves. The stop is simply the end point for the pattern. There systems can include a SHTF stop loss as a protective measure, but my research shows this is usually not necessary.
The end result is a trading system that uses little to no technical analysis of current price action. These systems have no configuration, so curve fitting is not an issue. There is no optimizations necessary, the patterns either work over long periods of time, or they do not. With Apple (AAPL), I have found winning patterns that work over two decades, I have found similar results with other stocks, such as Priceline (PCLN).
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