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What Trading Strategies Are Working In 2021?

Businessman using tablet for analysis stock market technical chart , Value investor concept.

2021 has been a rollercoaster of a year so far.

It was only in January that rioters stormed the US capitol and Donald Trump found himself banned from Facebook and Twitter.

Joe Biden was inaugurated on the 20th then we had the whole Gamestop saga.

Gamestop rallied from under $20 to over $450 and Robinhood had to halt trading leaving many investors unable to place trades.

gamestop stock

We’ve had all sorts of other events since such as a coup in Myanmar, a container ship stuck in the Suez canal, cold snaps, the rapid rollout of COVID vaccines and the rise of the Delta variant. Just recently. we have the Taliban taking power in Afghanistan.

Even so, the S&P 500 has managed to continue its advance to new highs and stock markets have been remarkably strong.

What Trading Systems Are Working Now?

As a systematic trader, it’s interesting to witness these events, but they rarely impact on the process of placing trades. A system trader’s job is to focus on finding alpha and then execute the next 100, 500 or 1000 trades.

But financial markets cater for both system traders and discretionary traders alike. These are the five types of trading strategies that seem to be working well right now:

1. Meme Trading

2021, without doubt, has been the year of the meme stock with incredible gains seen in some of the most unlikely companies. If you only placed one trade this year and that was to buy GameStop at $20 a share you would be sitting pretty right now.

The key to meme trading is to get in the stocks early. You need to buy as soon as you see any uptick in social sentiment and be prepared to cut losses quickly. Browsing social media and Reddit can provide clues as to the next target which is often a stock with a low share price and high short interest.

Although some traders have made a killing in meme stocks, many more have incurred big losses. It’s crucial to control FOMO and not get sucked into stocks that have already spiked.

2. Buy The Dip

There haven’t been too many big dips in 2021. But when the market has dipped (even by a small amount) it’s been a good time to get long.

One of our strategies called Perfect Pullbacks attempts to do this by using two optimized moving averages. The strategy has been backtested on the SPY ETF across many years of historical data.

So far in 2021, Perfect Pullbacks has produced a return of 30.76% while keeping the drawdown at less than -6%. This gives the strategy a 2021 risk adjusted return of almost 200%.

  • System Name: Perfect Pullbacks
  • YTD Return: 30.76%
  • Max Drawdown: -5.33%
  • CARMDD: 11.34
  • Win Rate: 80%
  • Risk Adjusted Return: 199.5%
perfect pullbacks trading strategy

3. Short Term Mean Reversion

Short term mean reversion has also been a strong performer this year, especially in highly liquid ETFs such as SPY, TLT and GLD.

Our trading strategy Bar Strength trades these tickers and has been doing well with low risk. The strategy has an average holding length of 6 days and is so far clocking a 75% win rate.

This has been a remarkably consistent trading strategy for us over the years and is already up 15% in 2021 with minimal drawdown.

Recently, I have been exploring adapting this system for options:

  • System Name: Bar Strength
  • YTD Return: 14.55%
  • Max Drawdown: -2.08%
  • CARMDD: 13.04
  • Win Rate: 75%
  • Risk Adjusted Return: 62.28%
equity curve

4. Trend Following Large Caps

A hallmark of 2021 is the continued move towards ‘winner takes all’ markets. We continue to see money flowing into the largest US stocks and ETFs.

Apple, for example, now trades at a $2.5 trillion valuation while Microsoft has also passed the $2 trillion mark. It may seem crazy but that is where markets are heading.

Our Jesse Livermore strategy is based on a similar philosophy of buying big winners and selling losers. It enters long trends in the biggest stocks during bull markets. But it can also go short during bear markets.

Our Jesse Livermore system has been another strong performer since we published it and the YTD return for 2021 is now pushing 40%.

  • System Name: Jesse Livermore
  • YTD Return: 39.60%
  • Max Drawdown: -15.18%
  • CARMDD: 5.28
  • Win Rate: 73.33%
  • Risk Adjusted Return: 83.12%
trend following large caps

5. Sector Rotation

Another source of alpha this year has been rotating into weak stocks in hot sectors. This is the idea behind our weekly system Sector Stragglers.

The system only selects stocks from the S&P 500 index and is currently up 15.42% according to our simulations.

That may seem like a small return but this has been another consistent strategy for us since we published it in August 2018.

  • System Name: Sector Stragglers
  • YTD Return: 15.42%
  • Max Drawdown: -4.22%
  • CARMDD 6.96
  • Win Rate: 56%
  • Risk Adjusted Return: 29.83%
sector rotation

And What’s Not Working?

We are living through a very comfortable period for stock investors, particularly in the large cap space. However, that doesn’t mean stock trading is easy or that all trading strategies are making money. Plenty of trading strategies are struggling, such as those shown below:

1. Short Micro Caps

Shorting micro cap stocks is risky at the best of times but in 2021 it has been a recipe for disaster.

The Reddit and Robinhood crowd means that shorting stocks took on a whole new level of risk in 2021. Several hedge funds have shut down due to this volatility and many famous short sellers have given up shorting until the situation calms down.

This risk is exemplified by our strategy Micro Shorts which is down a whopping -38.9% according to our simulations:

  • System Name: Micro Shorts
  • YTD Return: -38.88%
  • Max Drawdown: -47.37%
  • CARMDD: -1.22
  • Win Rate: 64.66%
  • Risk Adjusted Return: -226.90%
micro shorts

2. Volatility Trading

Although there have been some moments of volatility in 2021, the general trend for equities has been up.

Strategies that seek to buy and sell volatility ETFs such as VXX and SVXY have not had a particularly easy time. They have experienced whipsaws from quickly changing trends.

Our system Volatility Trader has been no exception, dropping -20% YTD with a win rate hovering just over 50%. That’s not a very good winning ratio for this system.

To tell you the truth, this has been one of our worst performing strategies since we published it in 2018.

  • System Name: Volatility Trader
  • YTD Return: -20.42%
  • Max Drawdown: -22.12%
  • CARMDD: -1.50
  • Win Rate: 52.17%
  • Risk Adjusted Return: -114.82%
volatility trading

Please Note: All trading results shown here are backtest results produced in Amibroker on 15th August 2021. These are not live trading results. Past performance may not be a reliable indicator of future results.

For more information about these trading strategies please see our full program Marwood Research.

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