I’ve noticed that countertrend systems seem to perform very well in “normal” trending periods, but are very poor when it comes to fat-tailed events. I was looking at a modified version of the “Double-7s” system that I read about in Technical Analysis of Stocks and Commodities magazine. The system buys when the close is equal to the lowest close in 7 days and if the close is above the 200-day moving average. The system exits when the close is equal to the highest close in 7 days. The reverse holds for short selling. In other words, the system attempts to buy on retracements, counter to the existing trend.
Below is a screenshot of my system test on the Hang Seng Index:
As you can see, system equity becomes more volatile and falls drastically from 2008 onwards, confirming that countertrend systems are one of the hardest systems to trade. In “normal” times though, it would provide the perfect compliment to a trending system, since it would offset the losses from a trending system. The trouble is figuring out when times are “normal!”