A Backtest On U.S. Bank Stocks, Trading Preparation And Chart Analysis

I ran a backtest on the three major U.S. banks to assess if these stock show momentum or mean reversion characteristics over the short-term. I tested how these stocks performed on the trading session after a having 3 consecutive down days and then after having 3 consecutive up days. 

Here are the results from the last 2 years of price action:

  • Bank of America (BAC) trades lower on average the day after having 3 consecutive down days (-0.02%) but trades higher on average the day after 3 consecutive up days (0.25%)

  • Citigroup (C) trades lower on average the day after having 3 consecutive down days (-0.15%) but trades higher on average the day after 3 consecutive up days (0.27%)

  • J.P. Morgan (JPM) trades lower on average the day after having 3 consecutive down days (-0.10%) but trades higher on average the day after 3 consecutive up days (0.27%)

While these results may seem a little counterintuitive at first glance, different stocks show different patterns, or as traders like to say, stocks have different personalities. 

What I would like to highlight here is the consistency of results among the three stocks. There are a few ways we could extend the study further, refining it and I may get back to this study in the next newsletters.

(chart: StockCharts.com)

Trading Preparation

Successful traders spend more time identifying good trading opportunities than actually putting on and managing trades. Your productivity away from trading is very important for your overall trading success. The time you spend in trading preparation will greatly enhance your probabilities of choosing the right trading setups.

Real Trading Example: I follow about fifty trading systems I have designed, and that consumes most of my trading-related time. I screen, evaluate, and rank them every day. I then decide which systems or setups are most appropriate to trade at any given time. This is the core of my work as a trader; the time I spend executing the trades is relatively small when compared to the time I spend preparing, sorting, and evaluating different trading opportunities.

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Disclaimer: Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your ...

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