Study of holding time, drawdown and fees.
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While out sailing today I got to thinking about the relationship between holding on to a trade in the hope that it returns to profit, draw down and overnight fees – particularly in relation to buying indices. Obviously the longer you hold a trade the greater probability of it returning to profit but the greater chance of larger draw down – but what about the effect of overnight fees? I wanted to see if their was a turning point where overnight fees made continuing to hold pointless as they just ate into any profit that you would eventually get.
So I wrote a simple strategy that bought the Dow Jones Index on dips on a weekly chart and held a position until it either returned to profit or had been held for a certain number of weeks. No filters. All trades were done at close of bar. I tested holding for anything from 1 to 52 weeks.
I added into the strategy my code for subtracting overnight fees to give a more true equity curve. Obviously this is still inaccurate as LIBOR rates have changed over the years and I had to choose one – so I chose the latest rate. Also spreads may have changed over the years so I had to fix that at 3.8 as well.
Here are the results:
It is quite clear that holding for too long is pointless. Equity increases up to about 14 weeks and then starts to decline as fees eat into the profits. Draw down also increases up to a similar holding length of time. It seems clear that for this strategy at least holding for an absolute maximum of 14 weeks is the most cost effective – holding beyond that is a waste of time as you will make less money and more likely have higher draw down.
Sometimes it is nice to see these things in a graph.
This is not about catching a trend – the strategy simply buys on a dip and then checks once each week whether the trade is in profit or not and exits if it is. The longer you hold out for this profit (that could be very small or very big) the more you pay in overnight fees. At some point it has to become sensible to give up and stop waiting for a profit. Bear in mind that major indices should always go up in the long run and you are buying on dips so unless it is the start of a major downturn profit should come along eventually.
My next test is to try the same thing on an DJI ETF with no overnight fees but just a fixed buy and sell fee as if you were just buying the ETF through your broker to see how it compares. Spread betting is not meant for long holds so it is interesting to try to quantify what is classed as a long hold.
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