Even very simple schemes like the 3/10 oscillator can capture the markets tendency to go to short term extremes. In the past year, the 3/10 oscillator method has captured several nice trades. See the equity curve above for SPY for the last four years.
The method buys when the 3/10 oscillator has gone down five or more days in a row and the close of the day is above the opening of that day. The position is then held for five days. (More elaborate exits may improve performance.) The method sells when the oscillator has gone up five days in a row and the close of the day is below the opening of that day. The 3/10 oscillator is just the difference between the 3 day simple moving average and the 10 day simple moving average.
While the method may not be suitable as a stand alone trading system, it does capture the market's tendency to overshoot. An exit after two favorable days or an exit after some movement of the oscillator will be investigated as possible improvements. Perhaps a more adaptive determination of extremes will yield a reliable core scheme for a trading system.
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