"Buy on Red" Test

I. Introduction & Overview

II. Results & Analysis

III. Conclusion

I. Introduction & Overview

This statistical study will answer the question, "is it better to buy on red or on green?" This study will classify "red" as any lower close and "green" as any higher close compared to the previous day.

The "buy on red" test will buy any lower close and hold for 1, 2, 3, 4, and 5 days. The "buy on green test" will buy any higher close and hold for 1, 2, 3, 4, and 5 days. The test will be run on the following symbols since 2003:

- SPDR S&P 500 ETF Trust (SPY)

- Invesco QQQ Trust (QQQ)

- SPDR Dow Jones Industrial Average ETF Trust (DIA)

- iShares Russell 2000 ETF (IWM)

The purpose for testing these four popular ETFs is to gain a generalized, aggregate measurement of the equities market by covering four major indexes: The S&P 500, NASDAQ 100, Dow Jones Industrial Average, and Russell 2000. The results will be reported for each individual ETF as well as a cumulative report, which averages mean returns and win rates across all four ETFs to obtain an aggregate picture.

II. Results & Analysis

Buying any red always produced higher mean returns than buying any green. The results for each individual Index ETF are shown in the statistical summary tables below:

When combining the results of all Index ETFs, the cumulative results reveal the following:

Cumulatively, buying on red yielded a consistently higher mean return. The average win rate between the two tests are incredibly similar. A graphed output of the cumulative results are shown in the graph below:

III. Conclusion

It is concluded that in general, buying a lower close yields higher mean returns than buying a higher close. This can be a powerful practice when determining an entry point, whether in an active range trade or a passive long-term hold. The results suggest that "buying the dip" can generally be a stronger practice than "buying the confirmation." As usual, this test disregarded any other forms of analysis and only compared buying any higher/lower close. However, this information can potentially be used to help create entry signals in trading strategies.