Kaufman’sMost Popular Books (available on Amazon)
Trading Systems and Methods, 6th Edition. The complete guide to trading systems, with more than 250 programs and spreadsheets. The most important book for a system developer.
Kaufman Constructs Trading Systems. A step-by-step manual on how to develop, test, and trade an algorithmic system.
Learn To Trade. Written for both serious beginners and practiced traders, this book includes chart formations, trends, indicators, trading rules, risk, and portfolio management. You can find it in color on Amazon.
You can also find these books on our website, www.kaufmansignals.com.
Blogs and Recent Publications
Find Mr. Kaufman’s other recent publications and seminars at the end of this report. We post new interviews, seminars, and reference new articles by Mr. Kaufman each month.
JUNE Performance in Brief
A good month all-around with the DowHedge and High-Risk gaining more than 10% and the other programs recovering from a nasty drawdown.
Although the index markets are well ahead of most funds, the stocks that are rallying are the ones that had the biggest drawdowns and others that were not on the radar. And it’s not clear that the market is in an uptrend, or just a temporary reprieve.
Major Equity ETFs
Investors don’t seem to care about the economy, tariffs, and the upcoming budget, all of which could severely shape corporate profits, labor, the cost of food, and the U.S. debt. We know that the stock market does not always reflect the economy, but these investors must know something that I don’t know. That’s why I’m not an economist.
On the other hand, U.S. debt is selling well, inflation is holding, and the Fed is still targeting two rates cuts later this year. The market likes that. However, note that IWM, the most speculative, is well off it’s highs and not much ahead of its January 2024 value.
Insert Major Index
CLOSE-UP: Constructing a Crossover Strategy
A crossover strategy can be a desirable alternative to a macrotrend system. It appeals to traders who are looking for faster profits and less give-back at the end of a trade. Yet, it is still trend-following.
In my memory, the first crossover strategy was Donchian’s 5- and 20-day average. Interestingly, it was used not long ago as the representative of how trend-follows were doing in a hedge fund report. However, the market is not the same as in the 1970s, and it didn’t last.
The market has gotten noisier. The 20-day moving average that was profitable in the 70s and possibly the 80s is now closer to a 100-day average. It’s because of volatility. Unfortunately, a 100-day average has both large drawdowns and a large give-back at the end. We’ll see if we can find a crossover approach that can do better.
We’ll look at the S&P, 10-year Notes, the euro, and crude oil, all futures, all back-adjusted, from 2000 to now. I’ll use a simple TradeStation program for both a single average and a crossover. Position sizes will use volatility parity, so that all positions have the same dollar risk.
Three Ways of Testing
Some analysts like to test the crossover approach by optimizing the long and short trends at the same time. Alternatively, we can test the long-term trend, use that, and test the short term. I think we will see in the results below, that (in this case) it doesn’t seem to matter.
We will also compare the crossover results to a single moving average to see which is best.
I like the idea of looking for the best long-term trend, then trying to find a way to trade in and out of that trend. If I know there is a long-term trend that is profitable, I want to see how a shorter trend can enhance it. But there are some markets that don’t have a profitable long-term trend. So we’ll need to be flexible when we interpret the results.
One caveat. If you remember, I prefer to look at the average of all tests. If they are all positive, or mostly positive, then the method is robust. Interest rates tend to be that way. The euro is also pretty good. I’ll show those results below so we can analyze them.
Moving Average and Crossover Rules
Personally, I always use the direction of the trend to decide the signal, rather than the price crossing the trendline. The price crossing the trendline can have more trades when the price gets stuck near the trendline. For short-term trading, I would use the price crossing the trendline, but then I don’t think a moving average works well with short-term trading.
For the crossover, I’ve defined three ways to generate a signal:
- Long when both trends are up, short when both are down. Out when they are in conflict.
- Long when the short trend crosses above the long, short when the short trend crosses below the long. Always in the market.
- Long when the price crosses above both trends; short when the price is below both trends, exit when it is between the trends.
Option 1 is the most conservative. Option 2 will enter a trade sooner, even when the long-term trend is going the opposite direction. Option 3 uses the price and can be out of the market. Options 2 is always in the market.
We will test the short-term trend from 5 to 40 in steps of 5, and the long-term trend from 40 to 150 in steps of 10.
Benchmark: Testing the Moving Average by Itself
For visibility, I’ll put the S&P and euro on a different lines from T-Notes and crude.
Figure 1a. Results of a single moving average for S&P and the euro.
Figure 1b. Results of a single moving average for T-Notes and crude oil.
An optimization found the long-term trend for the S&P and the euro, and a much shorter trend for T-Notes and crude. Note that, in general, the long side was much more profitable than the shorts. That is particularly true for the S&P and T-Notes. The longer-term trends also had higher profit-factors (reward to risk) and ratios of average wins to losses.
That’s our benchmark. While we tested from 10 to 150 in steps of 10 (15 tests), we were only interested in the tests from 40 to 150, which represents our macrotrend (12 tests).
Crossover Option 1
Option 1 goes long when both the short-term and long-term trends move higher, and short when they both move lower. If the trends conflict, we are out.
In Figure 2a we see that the S&P and the euro satisfy our premise, a long-term trend with a shorter-term trend to allow us to trade in-and-out. In both cases, the long trades dominate the results. Profit tactors for the euro (CU) are good.
Figure 2a. Option 1 for the S&P and the euro.
Figure 2b shows that T-Notes prefers shorter trends and still favors the long side (lower interest rates) The long trades have a good profit factor, percentage of profitable trades, and a low drawdown. I tend to not trade the short side of interest rates. Crude statistics are OK and good for diversification, but with more risk.
Figure 2b. Option 1 for T-Notes and crude.
In all four of these tests of option 1, the short sales return minimal profits and still have large drawdowns. It argues that only long trades should be taken.
Crossover Option 2
Long when the short crosses above the long, short when the short crosses below the long. Always in the market. Results in Figures 3a and 3b shows that profits are lower and the profit-factors are lower. There are many more trades. Entering a trade using the short-term while the long term is in conflict doesn’t not seem to be the best approach.
The only statistic that is better is the short trades for the euro. That may not be enough.
Figure 3a. Option 2 for S&P and euro.
Figure 3b. Option 2 for T-Notes and crude.
Crossover Option 3
Long when the price crosses above both trends; short when the price is below both trends, exit when it is between the trends.
The price crossing both trends does not mean that the trends are turning up or down. This option gets you into a trade sooner and the number of trades are higher and the profits are lower than either option 1 or option 2. However, drawdowns tend to be lower.
Figure 4a. Option 3 for S&P and the euro.
Figure 4b. Option 3 for T-Notes and crude.
How Do We Know that the Crossover is Robust?
What I’ve shown is the best of the optimizations. Perhaps these results were the only ones profitable, and all other combinations were losses? When I look at a single moving average, I like to see all of the tests profitable, or at least 70% of them grouped together.
There were 15 tests for the moving average. The number of profitable tests were:
- S&P 80% (the shortest tests tend to be mean reverting)
- euro 93%
- T-Notes 100%
- crude 73%
All of them qualify. That means nearly any results should give us a (long-term) profit when we trade. I tend to use multiple calculation periods to get an “average” result and not count on one combination to prevail.
Crossover Robustness
I’m always skeptical when we start optimizing more than one parameter. However, moving averages have good reliability. The table below shows the percentage of the 84 tests using the crossover. The short period was 10 to 40 in steps of 5, and the long was 40 to 150 in steps of 10.
Figure 5. Robustness of the crossover optimization.
Those are better than I would have expected, much in line with a simple moving average. I would still tend to use a few different parameters to avoid risk. Being able to use any combination and expect profits is a sign of robustness.
Now It’s Your Turn
Looking at the results, I prefer Option 1, using the two trends when they are moving in the same direction. It offers a way to exit the market, then enter when both the short and long-term agree. It has the fewest trades and good overall statistics.
I suggest that you run these tests yourself. These tests looked at only four markets, and that won’t be enough for a portfolio. Running them yourself and seeing the results will also give you more confidence.
A Standing Note on Short Sales
Note that the “All Signals” reports show short sales in stocks and ETFs, even though short positions are not executed in the equity portfolios. Our work over the years shows that downturns in the stock market are most often short-lived and it is difficult to capture with a longer-term trend. The upwards bias also works against shorter-term systems unless using futures, which allows leverage. Our decision has been to take only long positions in equities and control the risk by exiting many of the portfolios when there is extreme volatility and/or an indication of a severe downturn.
PORTFOLIO METHODOLOGY IN BRIEF
Both equity and futures programs use the same basic portfolio technology. They all exploit the persistence of performance, that is, they seek those markets with good long-term and short-term returns on the specific system, rank them, then choose the best, subject to liquidity, an existing current signal, with limitations on how many can be chosen from each sector. If there are not enough stocks or futures markets that satisfy all the conditions, then the portfolio holds fewer assets. In general, these portfolios are high beta, showing higher returns and higher risk, but have had a history of consistently outperforming the broad market index in all traditional measures.
PERFORMANCE BY GROUP
NOTE that the charts show below represent performance “tracking,” that is, the oldest results since are simulated but the returns from 2013 are the systematic daily performance added day by day. Any changes to the strategies do not affect the past performance, unless noted. The system assumes 100% investment and stocks are executed on the open, futures on the close of the trading day following the signals. From time to time we make logic changes to the strategies and show how the new model performs.
Groups DE1 and WE1: Daily and Weekly Trend Program for Stocks, including Income Focus, DowHedge, Sector Rotation, and the New High-Risk Portfolio
The Trend program seeks long-term directional changes in markets and the portfolios choose stocks that have realized profitable performance over many years combined with good short-term returns. It will hold fewer stocks when they do not meet our condition and exit the entire portfolio when there is extreme risk or a significant downturn.
Equity Trend
It may not look like much on a chart, but it’s a start! The daily Trend Program gained 2% to 3% and the Weekly gained about 4% and 2%. This seems to be a wait-and-see problem.
Income Focus and Sector Rotation
Gains of 1% to 2% may be the beginning of a recovery. This program did not sell-off as much as the trend programs, so this months gain looks good. If the Fed follows through on two rate cuts, we should see more gains.
Weekly Sector Rotation
Still holding the same ETFs – Utilities, Staples, and Financials with Financials leading the way in June. The Sector Rotations program gained another 2% after 4% last month. This may be the conservative program that investors are looking for.
DowHedge Programs
An odd difference between the Daily and Weekly programs in June. The daily gained 16% and is not up 10%, ahead of all the index markets. The Weekly program gained 2.6% and is still down over 7% for the year. We’ll check these results, but sometimes switching during the week can capture a sudden move.
High-Risk Portfolios
“High-Risk” means large losses and large gains. This month it was high gains. Portfolios gained 10% and 11%, reducing the this years drawdown to 7% to 10%. We won’t try to predict where this is going.
Group DE2: Divergence Program for Stocks
The Divergence program looks for patterns where price and momentum diverge, then takes a position in anticipation of the pattern resolving itself in a predictable direction, often the way prices had moved before the period of uncertainty.
After a gain of 10% last month, June posted over 7% for the 10-stock and 5% for the 30 stock. That puts these programs up by 10% and 6.5% for the year, and near new highs.
Group DE3: Timing Program for Stocks
The Timing program is a relative-value arbitrage, taking advantage of undervalued stocks relative to its index. It first finds the index that correlates best with a stock, then waits for an oversold indicator within an upwards trend. It exits when the stock price normalizes relative to the index, or the trend turns down. These portfolios are long-only because the upwards bias in stocks and that they are most often used in retirement accounts.
Gains of 5% and 4% reduce the 2025 drawdown by half. Buying pullbacks was not a good strategy so far this year, but a strong trend could change that.
Futures Programs
Groups DF1: Daily Trend Programs for Futures
Futures allow both high leverage and true diversification. The larger portfolios, such as $1million, are diversified into both commodities and world index and interest rate markets, in addition to foreign exchange. Its performance is not expected to track the U.S. stock market and is a hedge in every sense because it is uncorrelated. As the portfolio becomes more diversified its returns are more stable.
The leverage available in futures markets allows us to manage the risk in the portfolio, something not possible to the same degree with stocks. This portfolio targets 14% volatility. Investors interested in lower leverage can simply scale down all positions equally in proportion to their volatility preference. Note that these portfolios do not trade Asian futures, which we believe are more difficult for U.S. investors to execute. The “US 250K” portfolio trades only U.S. futures.
This years performance is very different from the past. While interest rates are usually the big winners, they posted the largest loss so far this year and not easy to offset.
Gains for more than 2% to 8% are a nice change for the Futures Trend program. There are still losses for the year, but they are becoming manageable.
Group DF2: Divergence Portfolio for Futures
Another good month, with portfolios up by 3%, 4%, and 5%, making the 2025 results up and down fractionally. After waiting patiently, this could be a rally!
Blogs and Recent Publications
Perry’s books are all available on Amazon or through our website, www.kaufmansignals.com.
June 2025
Yes, another article! “There is Money To Be Made On The Weekends – But You Need to Know The Market,” appeared in the June issue of Technical Analysis of Stocks & Commodities.
Perry gave a Webinar to “Trading Heads” in Mumbai, India on June 5 at 9:30 AM New York time. Discussed “Not the Usual Diversification.” With any luck, it was taped.
May 2025
You’ll find Perry’s article “Trading the Channel” more interesting than usual. Published in the May issue of Technical Analysis of Stocks & Commodities, it looks at various ways of construction a channel, and one very profitable one.
Perry also addressed a Spanish class where they are building algorithmic strategies. Called ROBOTRADER, it in ETSIT-UPM (Escuela Técnica Superior Ingenieros Telecomunicación- Universidad Politécnica Madrid). The presentation is about Diversfication (in English) and available on youtube.
April 2025
Perry did a studio interview with Jeff Baccaccio (“Rfactory”) in London in March. It is a fine production and a good interview. He has put it on youtube. I hope you enjoy it.
YouTube: https://youtu.be/jmR359jHYBQ?si=IHQ5bVLijGFM19qF
Another article in Technical Analysis of Stocks & Commodities for April, “Do Stops Really Work?” The conclusion even fooled Perry.
March 2025
Perry looks at an old standard in “Revisiting the 3-Day Trade,” which appeared in Technical Analysis of Stocks & Commodities in the March issue.
February 2025
Another article, “Chasing the Market” appeared in the February issue of Technical Analysis of Stocks & Commodities. It answers the question, “Can you make money entering the market after a big move?”
Perry enjoyed the “Fireside Chat” at the Society of Technical Analysts (STA) in London on Tuesday, February 11. It should be available for viewing on their website. He also taped another interview and we’ll let you know how to see it when it’s released.
He also posted “If you think the market will tank, here’s a plan” on SeekingAlpha. It has received lots of view and good comments, although it is advising deleveraging.
December 2024
“Overlooked Strategy Rules” appeared in the December issue of Technical Analysis of Stocks & Commodities. We tend to overlook certain rules that can make a big difference to results. This article looks at scaling in and scaling out of a position, delayed entries, correlations, and other simple but important rules.
October 2024
“Trading a Breakout System” was published in Technical Analysis of Stocks & Commodities. It looks at whether it’s better to enter on the bullish breakout, wait for confirmation, or buy ahead of the breakout. It’s a practical look at improving breakout results.
September 2024
Two articles posted by Perry, “The N-Day or the Swing Breakout,” (Technical Analysis of Stocks & Commodities) looking to see which is better. You would be surprised.
A look at deleveraging Artificial Intelligence stocks, a shorter version of the article posted in our “Close-Up” section. It appeared in Seeking Alpha earlier in September.
August 2024
“Theory Versus Reality” was published in the August issue of Technical Analysis of Stocks & Commodities. It discusses price shocks, diversification, predicting performance, and more.
July 2024
Perry posted a new article on Seeking Alpha, “Capturing Fund Flows.” It a good strategy for someone that wants to add some diversification. It only trades 3 days each month!
Older Items of Interest
Perry did a studio interview with Jeff Baccaccio (“Rfactory”) in London in March 2025. It is a fine production and a good interview. He has put it on youtube. I hope you enjoy it.
YouTube: https://youtu.be/jmR359jHYBQ?si=IHQ5bVLijGFM19qF
Perry was interviewed on June 27, 2024 by Simon Mansell and Richard Brennan at QuantiveAlpha (Queensland, Australia), a website heavy into technical trading. It appears on their website.
On April 18th, 2023, Perry gave a webinar to the Society of Technical Analysts (London) on how to develop and test a successful trading system. Check their website for more details, https://www.technicalanalysts.com..
Perry’s webinar on risk, given to the U.K. Society of Technical Analysts, can be seen using the following link: https://vimeo.com/708691362/04c8fb70ea
For older articles please scan the websites for Technical Analysis of Stocks & Commodities, Modern Trader, Seeking Alpha, ProActive Advisor Magazine, and Forbes. You will also find recorded presentations given by Mr. Kaufman at BetterSystemTrader.com, TalkingTrading.com, FXCM.com, systemtrade.pl, the website for Alex Gerchik, Michael Covel’s website, TrendFollowing.com, and Talking Trading.com.
You will also find up to six months of back copies of our “Close-Up” reports on our website, www.kaufmansignals.com. You can address any questions to perry@kaufmansignalsdaily.com.
© June 2025, Etna Publishing, LLC. All Rights Reserved.