STI Max Drop Investment Concept

Today is a down day again for STI. Not a good start to the year of the Rat.

I have received some emails on testing the max drop investment concept on the STI. So this is actually a continuation to my previous post on buying DOW Jones Industrial Average when it drops by 20%.

Instead of DOW, we are using STI index instead. Data is from June 10 1992 to Feb 11 2008.

The rules are:

Entry

1. Compute the highest price for the past 60 days. Lets call this H1
2. Note the lowest price today. Lets cal this L1
3. D1 = (H1-L1)/H1.
4. If D1 > 0.20 and there is no buy signal for the past 20 trading days, buy at the opening price on the next trading day
   

Exit

1. If position is showing a gain of 30%, close the trade or
2. If position has been open for 765 trading days (assuming 255 trading days per year), close the trade

The trading result is shown below:

The draw down in this case ranges from -0.87 to -50.5%. There were 11 cases where the 30% profit target was reached before the end of the 3 year holding period. The range of the draw down is too great for comfort. But do note that the probability of making a profit is still quite high at 85% if you ignore the trade that is still opened.

The trade made on 17 Jan 2008 so far has suffered a draw down of -11.3%. If we based on past statistics, maybe it will hit a draw down of -20%. This will imply a value of 2478.