Berkshire Hathaway Overnight Trading Strategy
The Berkshire Hathaway Overnight Trading Strategy is still another case that profitable trading systems can be built with the simplest of rules.
Incredibly, by looking at the relationship of only 2 bars, we could observe a clear and exploitable trading edge emerge.
Trading doesn’t need to be challenging. Ditch the obfuscated mish-mash of real trading signs and focus on ease. This strategy is a good illustration of what even the dullest dullard (me) can make with just a little effort.
Download it, study it, utilize it. Twist it into something of your own creation. Make it better. Make it special to you.
Among the wonderful things about learning how to backtest and program trading strategies is that the exhilarating sense of liberty, that feeling of’doing things ‘.
In lots of ways, backtesting and programming trading approaches will be very much an artistic endeavor. I’m no artist. However, once you understand how to work with raw financial data, you begin to see raw financial information as a sort of artistic raw material. Something at which you are able to apply your own hand and’something’ will emerge.
With just a little effort and work, some pleasant things can begin to take shape. Things that are of your own production. Things you can believe in, and feel proud about discovering and producing. And above all, have the freedom and courage to do.
Now, I want to talk about a stupid little stock trading strategy that trades just Berkshire Hathaway (B shares).
For those unfamiliar, Berkshire Hathaway is the publicly traded holding company for the world-famous investor, Warren Buffett. Each stock held in Berkshire Hathaway is pretty much’the creme de la creme’ of the stock exchange. Warren is no fool. For the last 60 decades, this old man has beaten the hell out of the stock exchange averages.
Yes, a great strategy would be to simply purchase Berkshire Hathaway and maintain it indefinitely. In a nutshell, we would like to buy Berkshire Hathaway in the finest possible short-term cost, and then sell it for a short-term profit.
Since betting against Warren Buffett is a fools’ errand, we are not interested in discovering a few novel notion at shorting Berkshire Hathaway. We only need to pick the most opportune times to purchase and sell in the shortest possible window of time. Hopefully with a gain. That is the subject of the article. Let’s get started.
Tools Used and Time Frame
For this trading system, we are going to be using Trade Navigator. This is the platform that I personally use. Why? Because its stupid simple to learn. And the support is the best in the business. If you need help creating a trading strategy, you can pick up the phone and one of the staff will screen share your thoughts into workable code.
Trade Navigator uses a programming language called TradeSense. Basically, it’s an extremely dumbed down computer language that was created for people like me–a complete fucking idiot with no High School diploma.
Another thing I like about Trade Navigator is that the data automatically updates every evening. It’s on your hard drive. And once you have the data, you can manipulate the raw data into just about anything you can imagine.
For this particular trading strategy, we are going to take raw, intraday Berkshire Hathaway (B shares) and create our own custom bar period.
This strategy is going to use only 130-minute bars. Why 130- minute bars? First, let me say that there is nothing magical about 130-minute bars. No Fibonacci Vortex, Gann Secret Square, or Elliot Wave mumbo jumbo about a 130-minute bar.
The 130-minute bar simply represents 1/3 of the trading day. There are 390 minutes in the trading day (for stocks). And so I wanted to look for simple patterns that emerge from only 3 bars that form during the day.
The Set-UP and Entry
Remember, there are only 3 bars for each trading day. Just three bars! Each bar represents 130 minutes of time.
For Bar #1, the very first bar, we want a UP CLOSE.
For Bar #2, the second bar, we want a UP CLOSE.
That’s it! We just want two consecutive UP CLOSE bars. If we get this specific condition…then on the open of the 3rd bar, we enter our Long trade.
I told you it was stupid simple.
Ok, now that we are long Berkshire Hathway, when do we get out of this trade?
We simply exit the trade on the open, the next morning. Yep, we hold the trade overnight!
Why hold overnight? Because as you will soon see, and for whatever reason…when Berkshire Hathaway has a bullish day, the odds are really good that the momentum will carry over into the Asian and European trading session.
Remember, Berkshire Hathaway is sort of a proxy that many people will view as the overall health of the US stock market. It holds what many consider to be the best stocks available. We want to take advantage of that momentum, and then dump the stock, the next morning.
How does this incredibly stupid and simple trading strategy perform? Let’s take a look.
For the following results, I tested January 2003 through March 2018. For each test, we are only trading with 100 shares of stock.
As you can see, for the past 15 years, this strategy just keeps on grinding higher and higher. What I find most impressive is the Profit Factor of 2 is really, really, really good for a strategy that has over 800 trades within the sample period.
Anytime you can find a Profit Factor > 1.8 over a sample size of 400 trades…you have a really nice pattern.
So now that I have published this pattern, you can reasonably expect that many traders are going to ‘jump on the bandwagon’. Which is OK. Berkshire Hathaway has a massive daily volume of between 1 to 2 million shares. So there is plenty of room before the edge is rubbed out.
Another thing I like about this pattern is the small drawdown of $1,300. However, when determining a stop loss for this particular system, what you really want to look at are the performance statistics: Largest Drawdown in Win (-$354), and Largest Loss (-$344). So set your stops outside of this range.
For those that like to drill even further (I don’t), you can see that the average drawdown for each winning trade is a reasonable (-$24) and Average Run Down in Loss is not a heart stopper (-$60).
Improving the strategy
The sample size of over 800 trades is quite large. Although you can trade it ‘out of the box’, there are also a few minor adjustments that greatly improve performance. Without over curve fitting. In my own derivation, a tiny little filter increases the average trade to $42 with a win rate of 85%. Really good. Am I going to tell you the ‘secret sauce’? Nope. You need to get your hands dirty.
Hint: add a VIX volatility filter.
Get your hands dirty. The gold is in the dirt. But you need to dig it out.
Wrapping things up
From reading this strategy, you should be able to see the ridiculous simplicity of this. It’s stupid simple.
Next, you should let your imagination take root and start to imagine alternative scenarios. For this strategy, we are only looking at 2-bars. But what happens if you explore all the possible scenarios for the complete 3-bars (130 minutes each)?
And what about testing each of these scenarios over a large universe of stocks, ETF’s, futures, or Forex? There is so much to explore.
Thanks for reading. Once again, you can download a free copy of Trade Navigator by clicking on the following link.
Once you have Trade Navigator setup. Then download the Berkshire Hathaway Overnight Strategy and import into Trade Navigator. The following link is a free download of the strategy.
No, I am not being compensated by Trade Navigator. I just want readers to succeed. And this platform, combined with a little effort, will shorten the learning curve.