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Pethuel Pomaloy · Follow

Aug 11, 2017 · 6 min read

Parabolic Theory-Based Stock Trading

Year-to-date Automated Backtest of Spyfrat’s Parabolic Theory using
Amibroker

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In
my previous post, I’ve said that based on my trading experience, I can
vouch that the parabolic theories of Senyor cutie Spyfrat can help us
identify very explosive and profitable stocks. In that post, I have also proposed
using the 10-prd MA as trail stop once the stocks go into parabolic mode.

But of course, one could still ask — how accurate and reliable can the system
be as to delivering returns? What will be our batting average if ever we will
only rely on using this system?

To answer this question and to be more objective with our approach, we

thought of putting the theory to the test. We ran a historical automated
backtest in Amibroker charting software based on buy conditions and sell
conditions patterned from Spyfrat’s theories and the 10-prd MA trailstop that I
proposed. Perhaps, if we look at how the system performed in the past, it can
boost our confidence in the system that it can overpower our own emotions.

Period covered for the backtest: Jan 1, 2017–August 8, 2017. So here is how it
went:
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To be able to ran backtest, we need to set our buy and sell conditions in
Amibroker.

Buy Conditions:
1. The stock’s weekly and daily RSI should be at parabolic territory
(trading above 70 level)

2. Weekly RSI should be greater than daily

3. The following moving averages should be arranged as follows:

SMA10 > SMA20 > SMA 50 > SMA100

4. The stock price should be trading above 10-prd MA

The first two conditions signify Spyfrat’s parabolic theory component of the
system while the last two conditions were conditions that I added so that we
could buy the stocks that are trading on an uptrend (strongest stocks).

Sell Conditions:
1. Sell when the stock’s daily closing price falls below 2% from the 10-prd MA
(this is to allow some leeway for some overshoot)

or
2. If the stock violates 8% stop loss
271 10
Please do note however that all transactions (whether its a buy or a sell) will be
Please do note however that all transactions (whether its a buy or a sell) will be
executed at the end of the day (EOD). Get started

Ranking System
Now that we have set the Buy and Sell conditions, a ranking system should
also be set so that if ever there are multiple stocks that satisfies the buy
condition, Amibroker will know what stocks to prioritize. For this experiment,
we set amibroker to rank stocks based on the Weekly RSI and Daily RSI
difference. Meaning, amibroker should buy first stocks with the biggest value of
RSI difference.

Portfolio Rules
To mitigate risk and manage the portfolio, we have also set some portfolio
rules:

1. Maximum of 50% total capital per position

2. Maximum of 2 positions at a time

So here is the result of the backtest:

…

...

13 Trades returning 304%. Disclaimer: I have not included TFHI in the list of stocks available for trading because
of its low volatility though its trading at parabolic levels.
 Get started

F
rom January 2017 to August 2017, the system generated 13 trades
based from the set-up we established and gave a return of 304.99%.
9 out of those 13 trades were winners, 4 were losers.

Effing awesome right?… Now I don’t know yet how to describe the quality of
the system as really I still don’t have a clue how to interpret the statistical
benchmarks used for this stuff (like sharpe ratio, ulcer index etc). For now, its
enough for me to say that the system can pretty much do the bottom-line that
we all want -> RETURN PROFITS.

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Let’s review each of the trades chronologically: *Note: Red line signifies 10-prd
MA, 1st lower pane show volume and 2nd lower pane shows RSI weekly and
Daily.*

Trade 1: $TUGS (1/3–2/21/2017) +26.8%

It entered $TUGS when it closed at 2.91 putting RSI Daily at parabolic level.
 Get started

Selling point +28.6%.

Trade aftermath. I think this was an excellent trade considering the weakness and consolidation after.

Trade 2: $ALCO (1/11–2/14/2017) +81.54%

1/11/17: Stock closed at 0.65 making daily RSI Parabolic.

Selling point last 2/14/17 when stock closed at 1.18. Went as high as 1.7+. Relatively huge drawdown from peak.
 Get started

Trade aftermath. Weeks after price went up high again to around selling point price but just consolidated after.
Good trade but 10-prd MA lagged significantly from peak rise of the move.

Trade 3: $PA (2/15–2/17/2017) -11.76% (Stopped out d/t 8% stop loss

rule)

Buy point.

Sell point.
 Get started
Trade aftermath. Relatively huge loss but a good trade looking back. It consolidated after the setup failure.

Trade 4: $LMG (2/17–3/8/2017) +18.30%

Buy point came during correction from a big move placing daily rsi value below weekly rsi.

Sell point. Choppy trade but nevertheless profitable.

Good trade in hindsight as big drop happened 5 bars after sell point.

Trade 5: $MAC (3/10–3/22/2017) -5.85%

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Buy point 3/10 when it did a breakout and made the rsi daily parabolic.

Sold at a loss after d/t breakdown from 10-prd MA.

Trade 6: $2GO (4/4–6/9/2017) +114.88%

Buy point came after correction from ceiling play that placed rsi daily value less than weekly value.

Sell point came 2 months after when it breached 10-ma after reaching a high of 30+ pesos.
 Get started

Trade aftermath. Very excellent bagger trade. No significant move after sell point as it consolidated.

Trade 7: $MAC (4/4–5/3/2017) +2.27%

Another entry in $MAC when price broke out from consolidation and RSI daily turned parabolic.

Sold 1 month after with minimal gains after breaking down from 10-prd MA. Fair trade.

Trade 8: $WPI (5/5–5/17/2017) -4.35%

Buy point. Breakout + Daily parabolic but note thes mall difference from weekly rsi.
 Get started

Trade turned out to be choppy and sold below acquisition price.

Trade 9: $RCB (5/22–6/7/2017) +5.97%

Buying point whas when RCB gapped up effectively placing RSI daily into parabolic status.

Selling point and aftermath.

Trade 10: $MAC (6/19–present) +101.6%

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Buy point when MAC closed at 5.68 after breaking out from 5 and daily rsi went parabolic.

Up to now (8/8/17), position is still open.

Trade 11: $IMI (6/20–7/21/17) +17.58%

Buy point when $IMI closed at 13.2 and RSI daily entered parabolic state.

Sell point when IMI closed below 10-prd MA.

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Aftermath. Excellent trade.

Trade 12: $LSC (7/24–7/25/17) -12.00%

Buy point when $LSC closed at 2.5 and RSI entered parabolic level.

Turned out to be a whipsaw trade as it hit stop loss level the next day.

Trade 12: $PMPC (8/1–present) +25.46%

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Buy point when PMPC closed at 10.84 and daily rsi entered parabolic levels.

No signs of stopping just yet.. but a choppy trade.

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Personal takeaways:
1.) A stock picking and entry system based on parabolic setups can be a
profitable system as back tested in the covered period and has good batting
average.

2.) The 10-prd MA used as trailstop in trading stocks with parabolic setup is
enough for us to give some decent gains and stop us when nothing happens
(in so far as the covered period is concerned).

3.) We may not be able to maximize returns for a specific stock trade by selling
at the highest point but I think the more important thing is that we should
focus more on the cumulative return on portfolio rather than individual
returns per trade. Consistency rather than pinpoint accuracy.
 Get started

Next course of action / Ideas: Possibly try on different covered periods, try
adding another sell rule (EOD pHR / ePHR), note relationship of peak price to
10-prd MA breakdown (if ever there is any), use different portfolio rules (more
maximum positions open with less maximum allocation etc).

If you have any other ideas, you can share them to us..

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