Frequently Asked Questions:
Note: Please take the time to thoroughly read the FAQ questions and answers below. The SPY Systems are a collection of 21 individual systems, which I like to call sub systems, however each system is its own system. All of them are reversion to mean systems, except for the breakout system, and are based on past market statistics.
Q: Can you tell me more about this collection of SPY systems?
A: The SPY Pro systems are a collection of 21 sub systems most of them are reversion to mean meaning that they will attempt to buy oversold pullbacks, or short oversold rallies in downtrends. They are based off past statistics and look for high probability trade situations based off rare statistical occurrences. For example let's say the market was very oversold and very far below it's 9 day EMA, you have a rubber band situation there where price is due for a reversion to the mean and test or close back over its 9 EMA. That's what the systems do, they look for areas where the market is too stretched and due for a mean reversion, then get back out of the market once that price reversion occurs. The systems are in cash most of the time, think of them like a tiger stalking in the bushes for his prey, he waits for the right opportunity and then pounces, that's what these systems do. A recent trade was a short triggered from the Exhaustion Short sub system, which was taken on 9/2/20, and the market sold off strongly starting the next day. The name of that sub system itself is pretty descriptive of what that sub system is looking for i.e. exhaustion short, it sensed correctly that the market has been trading up for too many days in a row and was due for a correction. That exhaustion condition has only occurred about 20 times in the last 25 years with 93% of them producing winning trades or pullbacks. Remember these sub systems simply look for trade opportunities whenever the market gets stretched one way or another, it then looks to close the trades out after that mean reversion occurs. These sub systems are completely opposite to the KISS SPX 401K which is a trending system that tries to stay long all the time in uptrends. These systems are mostly in cash, and look for trade opportunities here and there.
here's a description of each of the sub systems.
1. Trend long - only buys pullbacks when prices are above long term MA's along with up sloping MA's, exits when certain indicators recycle
2. QE Long - A reversion to mean trade similar to the Larry Conners RSI 2 reversion to mean strategy, however uses a %R indicator instead. Price must be over the 200 day MA for longs and below for shorts.
3. Pullback long trade - similar to the Trend Long but slightly different settings
4. Bear Long - a special type long trade that only occurs in bear markets, very stringent conditions and rare but very reliable. various filters built in here to allow it to exit quickly if need to for a small bounce only, or hold the trade for 1 - 2 months if conditions look ripe for a strong move off the lows
5. Exhaustion Long in bull market - opposite of the Exhaustion Short above, occurs when price is too stretched oversold, however price is still in a bull market. Bull market is defined generally when price is above the 200 MA and it is in a positive slope. I have two versions of this, 1 and
6. Exhaustion Long in bear market - similar to the one above, but occurs in bear markets so price has to be stretched MUCH further oversold
7. RSI 14 long off 40% - occurs in bull markets only, when 14 RSI V's off the 40% level
8. RSI 14 oversold trade - RSI is very oversold long, various filters built in here to allow it to exit quickly if need to for a small bounce, or hold the trade for 1 - 2 months if conditions look ripe for a strong move off the lows
9. Strap Long - a specialized Long trade that occurs when a fast stochastic gets oversold but price remains above a short term MA like the 20 - 30 MA
10. 60 Stochastic Long off 50% - uses a 60 Length Stochastic, which is a trending Stochastic setting, the condition occurs near the 50% level of the 60 length Stochastic.
11. Breakout System - This is a NEW system that I developed in early 2017 that is non-reversion to mean. It is different than the other long strategies in that it doesn't require a pullback in an uptrend to go long, instead it buys strength or a breakout condition! In very low volatility markets like the one we've seen in 2017 that has had the lowest volatility in 100 years, the market has had very shallow pullbacks which were not deep enough for many of the reversion to mean systems to catch - the breakout system can catch these trades. This system addition is yet another diversification to the system.
1. QE Short - Like the one above, but for shorts, different filters etc
2. Exhaustion Short #1 - this trade take short trades when the market is in a very strong uptrend, but statistically is very very stretched such as over 22 days above the 8 day MA and %R over 90%, exits on a quick pullback. I have 2 versions of this, 1 and 2
3. Exhaustion Short #2 - same methodology as above, however slightly different settings
4. Hi, Mid, Low short - these are three type of short trades that occur primarily in bear markets when price gets overbought, I have 3 types of these
5. 60 Stochastic Short off 80% - uses a 60 Length Stochastic, which is a trending Stochastic setting, the condition occurs near the 80% level of the 60 length Stochastic.
6. 60 Stochastic Short off 50% - same general logic as the one above, except this condition occurs near the 50% level on the 60 length Stochastic.
7. 34 Stochastic Short off 80% - same as trades above but uses a 34 length for Stochastic instead of 60 length
8. 60 DVDS Stochastic trade - similar trade to above, but uses a special normalized Stochastic indicator
9. Strap Short - a specialized Short trade that occurs when a fast stochastic gets overbought but price remains below a short term MA like the 20 - 30 MA
- that's a list of most of the individual small systems, that all work individually, and together
Q: Why did you build a system using the SPY ETF?
A: Because SPY is the ETF for the S&P 500 and it is very liquid with very tight spreads and trades until 8 pm in after hrs market. The SPY ETF is also one of the cleanest representations of the S&P 500 cash and does not degrade. You of course are free to choose whatever S&P 500 related instrument you want. Also systems remove some of the emotion, which can be one of the main pitfall for many traders. In addition, systems have a discipline, set rules and money management, which many novice or newer traders lack. For the SPY system we trade the SPY, SH, SSO, SDS, UPRO, and SPXU ETF's, and of course SPY call and put options.
Q: What are the parameters to the system, how are the trades generated
A: That's a trade secret, and it is closely guarded to insure the integrity of the system. We are not selling the system code, only the buy/sell signals. However, generally speaking the system uses the principle of 'mean reversion' more so then "momentum Trading." However the system has intelligence built in so that it will attempt to ride a trending move when the opportunity arises. For example the average trade length is about 13 days, however that's simply an average as some trades can be held for a little as 3 - 5 days, while sometimes the system will catch trending moves and stay in a trade for 2 - 3 months! You can see visual examples of this in the 'Trade Examples' section.
Q: How and when are trades entered?
A: All 'new' trades are entered at the close of the day per the statistics, which makes this a true end of day swing system and something one could easily trade while working a full time job as you do not have to monitor the market all day long, just near the close for a few minutes.
The various sub systems can have up to 3 total entries with 3rd entries very rare occurrences and the majority of the trades being 1st and 2nd entries.
Q: How and when are trades exited?
A: Shorts: All Shorts are exited at the bar close just like the entries. However some trades can be exited via profit targets, which are rarely hit unless the trade has had a huge move i.e. as over 10%.
Longs: Most longs are also exited at the closing bar. However a few trade types are exited on the market or bar open. I communicate all trades via email notification to let you know when to exit.
Q: In addition to buying ETF's like SPY and SSO for the trades, you also call out SPY call and put options for system trades?
A: Yes, for options I typically buy options with an expiration about 2 months out. For first entry trades I target a delta of 0.6, for 2nd entries I target a delta of 0.5, and for rare 3rd entries I target an even lower delta below 0.5. The thought process there is that 2nd and 3rd entry options have a higher probability and thus I I can buy options with lower delta to give more leverage. Also PLEASE be aware that SPY options trade until 4:15 so you can buy them after the cash market close! Therefore you have 15 min to enter these after the market close, many folks are unaware of this as all other options cannot be traded in after hrs market.
Q: How will I be notified when the system does a trade?
A: Whenever the system does a trade, I send out a trade notification to all Breakpoint Trades subscribers. Additionally most of the time I also send you an early trade notification in the middle of the day to notify you that there might be a system trade by the close, and I then confirm the trade with a second email near the close. I will also send SMS text messages (if you have this service set up for your cell phone). However you don't need to pay for the SMS service because you will be emailed for free. I also post the trade signals on the 'Trading Community', which is our active intra-day forum for the website. Thus it's always a good idea to check the Trading Community as well. I also discuss the system in the newsletters from time to time, however that's for extra or more detailed information, the official trade notifications are sent via email.
Additionally: The trades are added to this SPY Pro System section; you will see the current trade status at the top of every page in large font bold letters, and when the trades are closed out, they get added to the Trades List section. The current trade status at the top of each page: SYSTEM Is Flat means that the system is not currently in a trade and is in cash. When the system is in a position such as SPY or the 2nd entries using SSO or SDS it will be designated there as well.
Q: Can you tell me some of the typical statistics to the system, what's the average gain? How long are the trades typically held? How often does it do a trade, etc?
A: First off, you can view the detailed statistics to each of the 21 sub systems in the System Statistics section as well as some combination of the systems combined into a few charts. All the statistics have trade data back to Jan 1995 or over 25 years and thus include all sorts of market condition from bull and bear markets, sideways market etc.
The majority of the systems have high profitability with 90% or greater winning trades, and high profit factors greater than 10. A profit factor is calculated by the total net profit / total net loss. For example if a system makes $100 and loses $100, then the profit factor will be 1 i.e. 100/100. A system that makes $100 and loses $10, has a profit factor of 10. Systems with profit factors of greater than 3 are considered good and all of our systems have profit factors greater than 10.
Again check out the Systems Statistics section, you will find addition statistics on the number of trades, average time in a trade, max historical draw downs etc.
Q: What type of trades does the system typically do? What's it based on, parameters etc
A: While I can't get into secret sauce, the system is a combination of reversion to mean type trades that look for opportunities to quickly get in and out of the market (like hitting singles baseball analogy), There's also trending components where the system will attempt to hold trades for longer swing trade opportunities (home run trades).
The system is actually a macro system that is made up of, or diversified across 21 sub systems that all work in concert with one another. Each sub system does different things and are actually whole systems on their own that can be run individually. My thought process with this was that this gives the system a huge diversification, it's like running 21 systems vs 1. Many systems out there are composed of only one trade type, such as a Larry Connors RSI 2 system etc, and so if that system gets out of sync with the market, you are out of luck. Since my system is devised of 21 systems that all do and look at different things in the market (some are reversion to mean, some are trend following, some are breakout), the odds off all of these systems getting out of sync with the market at once is astronomically low in my opinion. That's how I've approached this system; it's taken years and thousands of hours of code and development, and of course I'm never done, I will continue to further tweak and add new trade types and filters as I discover them, so one day there will be 25 sub systems, then 30 and so on. You can read a description of the current sub systems from the 'Overview' tab
Q: Is this system curve fitted, how do I know that it won't just stop working?
A: Well first off, there are no guarantees in life, especially trading. Thus just like any system. it could stop working at any time (read our disclaimer). However that being said, a lot of care went into these systems, and they have been backtested against all market conditions (bear markets, bull markets, sideways markets, extreme volatile markets) by testing the systems back to Jan 1995 or over 25 years! Remember the majority of the systems are 'rubber band' type of trades i.e. enter trades when the market gets too stretched one way or the other and then quickly exit after a reversion to mean move.
- Q: I just recently subscribed and become a member of BPT, however the system is already in a trade, should I enter the trade now?
A: In most cases, the answer would be NO, especially if the trade is up substantially from the original entry price and you would be buying at worse prices than where the system entered, this would not be ideal from a risk/reward scenario. I would only consider if you can get a price close to or better than where the system entered.
Q: How much money should I invest in the system trades?
A: That's up to you and you have to make your own trading decisions based on your objectives and personal risk/tolerance and we are not investment advisers; however we suggest using proper money management. What we mean by this is, don't put 100% of your total capital into the system trades or leverage up your account using margin for the system trades. It's no different when trading normal stocks, diversify your holdings, don't place all of your eggs into one basket! On the website for simplicity we show each ETF entry as $10,000 and trade 1, 2, 3 SPY options for 1st, 2nd, and 3rd entries respectively.