How to Make Technical Trading Actually Work in Five Below Inc
Five Below Inc (NASDAQ:FIVE) : How to Make Technical Trading Actually Work
Date Published: 2023-05-22Disclaimer
The results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.LEDE
At some point, after all the social media craze and pundits on financial television drawing lines on stock charts, we need to stop the noise and just answer, once and for all, has technical trading actually worked in the past?
Answers, empirical and explicit, not just some guy drawing lines on a chart -- that's what we're after.
ANSWERS
This is a technical analysis triggered momentum trade that bets on a bullish move in the underlying stock for a period that starts the day Five Below Inc (NASDAQ:FIVE) triggers a breakout from the TTM Squeeze signal and lasts until two-days in a row show reversed (bearish) momentum. It has been a winner for the last 5 years.
Five Below Inc (NASDAQ:FIVE) IDEA: TTM Squeeze Technical Trigger
The idea is simple -- stocks tend to move in tight ranges for the majority of the time, and then they move in bursts for the remaining periods. The breakout from the TTM Squeeze attempts to find these bursts.
Here is a simple graphic, where the gray line is the daily stock price, the blue bars comprise the tight squeeze zone, and then we see the break out into a bearish move. Roughly speaking, this is the pattern that this technical indicator is attempting to identify and back-test.
The goal, of course, is to find these breakouts before they occur.
Rules
* Open the long 90/40 delta call spread on the day the TTM Squeeze has been broken with upside momentum.* Close the call after that signal has seen a consecutive two-day reversal.
* Use the options closest to 15 days from expiration.
* Never trade earnings -- irrespective of the technical indicator, this trade will close 2-days before a scheduled earnings announcement.
This is a straight down the middle bullish bet -- this trade wins if the stock rises and will lose if the stock does not.
RESULTS
Owning the 90/40 delta call spread in Five Below Inc (NASDAQ:FIVE) over the last five-years but only held it after a TTM Squeeze was triggered we get these results:| FIVE: Long 90/40 Delta Call Spread
Signal: TTM Technical Squeeze |
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| % Wins: | 72% | ||
| Wins: 13 | Losses: 5 | ||
| % Return: | 66.7% | ||
Check it out Yourself: Tap Here to See the Back-test
The mechanics of the TradeMachine® stock option backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
We see a 66.7% back-test return, which is based on 18 trades in Five Below Inc. A bullish breakout from the TTM Squeeze is a technical signal that doesn't happen often, but rather is designed to mechanically identify the times when a stock is in a low volatility period and may be about to thrust higher. It's a signal based on probabilities, not absolutes, so it won't work all the time.
Looking at Averages
The overall return was 66.7%; but the trade statistics tell us more with average trade results:➡ The average return per trade was 6.56%.
➡ The average return per winning trade was 27.99%.
➡ The average return per losing trade was -49.14%.
Advanced Option Analysis
The choice of deltas, in this case the 90/40 call spread, was not an accident. We empirically and explicitly checked various combinations for a call spread using the bull squeeze breakout and found this one to be the best.
The returns over the last five-years over the 270 most liquid option names showed a return that was higher than simply buying a call spread with statistical significance of nearly 99%.
Technical Details
For the details about the TTM Squeeze, how it works, when it's triggered, why it's relevant and what it means, you can discover scientific option trading from the link (which leads to a short video).
WHAT HAPPENED
This is one way people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.