In Dr. Martin’s Zweig’s winning on Wall Street he presents a trading idea that was inspired by the work of his friend Ned Davis. It is a very simple trading method based on weekly data from the Value Line arithmetic index. The rules are quite simple and the results are impressive.
Buy – Buy when the weekly changed of the Value Line index is greater than 4% up
Sell – Sell when the weekly change is greater than 4% down
Hence the creative name the 4% model. Remember this system was written back in 1986. So how well looking forward did this system do?
I only have weekly data going back to 1992, but the 500% return is not so bad, and visually the draw-downs look tolerable. The system struggled coming into 2008 with the volatility and several 4% weeks causing it to whipsaw, but look at the value of the equity today… the equity curve is at an all time high! Boy what I would do to be there! The system bought in on the 3/13 bar this year and has not been shaken out yet since we have not had a 4% weekly retracement yet.
I will begin tracking this model as part of this website so we can follow it’s signals. It very rarely fires a buy or a sell. On average it stay in a trade for 34 weeks. In a winning trade it stays in on average 49 weeks, almost an entire year. For a losing trade it tends to be shaken out in about 6 weeks. So far this system has been in the current trade for 9 weeks.
To track this system we will use the Value Line arithmetic index whose symbol for TradeStation is $VAY. We will use $VAY to trigger our system and we will buy RRY which is the Ryder 2x Russell mutual fund. I also added a 10% stop to the strategy. Had we traded this system since March this would be our current trade status:
