Risk On /Risk Off Strategy with ETF

Is possible to be determine when to be on the right side of the market , most of the time ? well yes, using simple market timing strategies such as the SPY             against it's 200 ma, would help you avoid all the bear market in the last 20 + years . But is there another way to do this ?

Here's a strategy i'm currently forward testing in my IB             account. By calculating the ratio of two ETFs ( one tracking the market , the other cash or bonds) , and plotting it against it's 100 moving average , produces some interesting results.

Risk "On" instrument : SPY             ( SP             500)
Risk "Off" Instrument : TLT             ( 20 Year Treasury)

based on the results , the strategy doesn't always beat the S&P 500             , in fact , it only beat the market 3 years out of ten and matched the same return in 2014. More importantly, it performed very well during bear markets , look at the return for 2008, 2011.

The backtest looks good , but i only rely on forward/ live testing results. I will try to update this post with my results.



P.S , the strategy has been in TLT             ( risk off) since July 2014.
hi! like your risk on/risk off idea of spy/tlt compare to a MA

two quick questions.....what system are you using for your backtesting?? and did you ever test this system for 2015 and 2016?

+1 Reply
Hi Zeke

Thank you for the feedback.. i usually use excel for backtesting, but you can reproduce this in ETFREPLAY.COM , a great tool if you like ETF and would like to test different scenario.

the return for 2015 : -6.5 %
2016 : -1.2 %

my version flipped into TBT about a week ago and as of today we are indecisive
I really like this idea, I was also looking at a strategy that used the index crossing its 2yr MA as a risk off. What are your thoughts on the benefits of your strategy vs. this idea?
Algokid mazer_rackham
Sorry for the delay . Using the 2 year MA ( 400 day MA ) is also good. I backtested that strategy and here what i found :

from 2000 - 2015 :

4 trades were placed, 2 winners ( closed), 1 loser , current position is open since 2011 and positive

Buy Sell Return
Oct 31, 2000 Nov 30, 2000 -7.46%
Jun 30, 2003 Jan 31, 2008 +52.66%
Sep 30, 2009 Sep 30, 2011 +11.44%
Oct 31, 2011 Feb 12, 2015 +78.11%

I like these results .
Also, do you have any drawdown data? Again, thanks for this idea. It could make a nice complement to the Carlucci strategy.
+1 Reply
Algokid Algyros
thanks for feedback Algyros.

let me run a test and get back to you
Algokid Algyros
Max DD for the test was 17 % compared to 54 % for the SPY , annual CAGR is 13.7 %.

when testing with SH ( from 11/2006) CAGR is 9 % , Return of 112 % ,and Max DD of 26 %
+1 Reply
Very interesting. Thanks. Given the caution required when dealing with backtests, do you have data on what the CAGR would have been during the backtest period? Also, what would the strategy have looked like if instead of bonds, it had shorted the market (with SH, for example).
+1 Reply
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