The pullback strategy

Published: 11. January 2024

As an active trader, you are always on the lookout for a strategy that works. Often, you end up having your trading screen filled with a jumble of lines and advanced indicators. But maybe it doesn’t have to be so complicated. The active trader, blogger, and analyst Joe Marwood has run backtests on a very large number of strategies, and in a post from early July 2018, he ends up recommending a ‘pullback strategy’ that can be used in indexes, ETFs, and even in individual stocks with a solid return.

In a test that runs from 1995 to 2018, Joe Marwood achieves a risk-adjusted return of over 28% per year using the so-called pullback strategy. Based on his tests, Marwood assesses that the strategy can also be used on other indexes as well as ETFs and stocks with high volume. However, as always in trading, there is no guarantee that a historical return will continue in the future using the same strategy.

The strategy is strikingly simple and works as follows:

Open your trading platform and insert a 200-day moving average and a 10-day moving average on the product you wish to trade. (For example, the S&P 500 index).

On most trading platforms, you can search for SPY (which is an ETF of the S&P 500 index) or the index itself, which is designated USA 500. When you have the chart up in the window, you should click on the small symbol for adding an indicator at the top of the chart (see the graphic below). Choose SMA (simple moving average) on the price window and add in two rounds respectively a value of 200 days and 10 days. Make sure it is a daily chart.

The basic idea is to buy into the index when the price pulls back a bit but is generally in an upward trend.

Buy when: The market (in this case, the S&P 500) closes ABOVE the 200-day moving average, while the price closes BELOW the 10-day moving average.

Sell again when: The price closes above the 10-day moving average OR if the price hits 10% below your entry.

Usually, you can assess whether the market closes above or below the moving average just before the closing time of the American stock exchange. This means that you can buy a few minutes before closing time (at 22:00).

As seen in the figure below, there are sometimes trades with relatively small fluctuations that last over a few days, so if you want extra speed on your investments, you can choose to leverage your position. On most trading platforms, the SPY ETF is by default leveraged 5 times. This means that a 1% increase in SPY will result in a 5% profit. Naturally, a 1% decrease will also mean a 5% loss. If you choose the USA 500 CFD index instead, it is leveraged 20 times, which is 4 times as much as the ETF.