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I tested the “Double 7” strategy popularised by Larry Connors in the book “Short Term Trading Strategies That Work”. It’s a pretty simple strategy with very few rules.
Setup steps are:
Entry conditions:
Price closes above 200 day moving average
Price closes at a 7 day low
If the conditions are met, the strategy enters on the close. However for my backtest, I am entering at the open of the next day.
Exit if the price closes at a 7 day high
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Backtest
To test this out I ran a backtest in python over 34 years of S&P500 data, from 1990 to 2024. The equity curve is quite smooth and steadily increases over the duration of the backtest.
Negatives
To check for robustness, I tested a range of different look back periods from 2 to 10 and found that the annual return is relatively consistent but the drawdown varies a lot.
I believe this was because it doesn’t have a stop loss and when I tested it with 8 day periods instead of 7 days for entry and exit, it had a similar return but the drawdown was 2.5x as big. So it can get stuck in a losing trade for too long.
Variations
To overcome this, I tested a few different exit strategies to see how they affect the results:
Add stop loss to exit trade if close is below 200 MA — This performed poorly compared to the original strategy
Exit at the end of the same day — This also performed poorly
Close above 5 day MA — This performed well and what’s more, it was consistent across different lookback periods, unlike the original strategy rules.
Trailing stop — This was also good and performed similarly to the 5 MA close above.
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Based on the above. I selected the “close above 5 day MA” as my exit strategy and this is the equity chart:
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Results
I used the modified strategy with the 5 MA close for the exit, while keeping the entry rules standard and this is the result compared to buy and hold. The annualised return wasn’t as good as buy and hold, but the time in the market was only ~18% so it’s understandable that it can’t generate as much. The drawdown was also pretty good.
It also has a decent winrate (74%) and relatively good R:R of 0.66.
Conclusion:
It’s an interesting strategy, which should be quite easy to trade/automate and even though the book was published many years ago, it seems to continue producing good results. It doesn’t take a lot of trades though and as a result the annualised return isn’t great and doesn’t even beat buy and hold. But used in a basket of strategies, it may have potential. I didn’t test on lower time frames, but that could be another way of generating more trading opportunities.
Caveats:
There are some things I didn’t consider with my backtest:
The test was done on the S&P 500 index, which can’t be traded directly. There are many ways to trade it (ETF, Futures, CFD, etc.) each with their own pros/cons, therefore I did the test on the underlying index.
Trading fees — these will vary depending on how the trader chooses to trade the S&P500 index (as mentioned in point 1). So i didn’t model these and it’s up to each trader to account for their own expected fees.
Tax implications — These vary from country to country. Not considered in the backtest.
Code
The code for this backtest can be found on this github: https://github.com/russs123/double7