The Best Growth vs. Value trading strategy

I took a new look at the Growth vs. Value strategy I described in last weeks post . With a fresh set of eyes I was able to significantly increase the historical performance and reduce the drawdown. The concept is the same in that this is a long/ short trading strategy that is always invested. Long trades are entered when Russell 2000 growth outperforms Russell 2000 value and short trades are entered when the opposite is true. A minor revision in the way I was measuring the relative strength of the Russell indices translated into a major improvement of system performance. Below you will find the new performance reports of this new and improved Growth vs. Value trading model.

This is a picture that shows the recent long and short entry’s on a chart of IWO. A solid green line depicts a profitable trade and a solid red line represents a losing trade. Currently the model is long from June 2010.

Below is the performance report based on taking 100 share trades in the IWO since 2001. Historically this system has average 10 trades per year and 70% of the trades were winners. Winning trades averaged 2 times the size of losing trades. You can see that when compared to the prior strategy every performance metric is improved. (Click image to enlarge )

Below is a hypothetical equity curve that shows the growth of $100 invested in this strategy. The $100 invested would have grown to a whopping $1189 in the 10 year trading history of the IWO. That translates to a 28% annual return and the largest peak to trough equity drawdown was -10%. As a comparison the prior growth vs. value model averaged a 17% annual return with a maximum drawdown of -27% and buy and hold in the IWO would have only gained 4.5% annually with a maximum drawdown of over -50%

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Equity Curve of $100 invested in "The Best Growth vs. Value trading strategy". (Click Image to enlarge)

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