Trading the TQQQ ETF without a strategy can be dangerous. As one of the key 3x ETFs available, it is used by traders to take advantage of the strong moves in the Nasdaq-100.
I trade a strategy I developed called the TQQQ Trading Strategy that trades only the TQQQ ETF. The strategy and all the rules, process steps, and chart setup parameters can be found in the TQQQ Trading Strategy eBook, available by clicking the image below.
In this article, I will show further details into how the strategy has performed since May 2010.
TQQQ ETF Backtest Tools
The TQQQ ETF backtest statistics for the TQQQ Trading Strategy are generated using Amibroker and Norgate data.
Amibroker is a software package that lets traders code a strategy and backtest to see how it would have performed in the past.
Obviously past performance is no guarantee of future performance. However, as traders it is often all we have.
I also couple Amibroker with Norgate Data, who survivorship bias-free historical data and stock price updates for “end-of-day” daily financial market data.
By combining Amibroker and Norgate, I am able to see how the TQQQ Trading Strategy has performed in the past.
The TQQQ ETF Backtest Results
What I am going to show you below are the exact outputs from Amibroker. I wanted to screenshot them directly so there would be no worry that these results were doctored.
To start, below is the equity chart generated by the backtest from May 10, 2010 until December 31, 2019 starting with $25,000.
IMPORTANT: I have run the backtest until December 31, 2020 and not to the current date. The reason is that due to COVID-19 and the downturn in the market, the strategy experienced huge growth. It was the most profitable trade for the system.
So, instead of including that amazing trade to cherry pick strong performance to try to sell the system, I decided to show the performance without this period. You can see the difference in the equity charts below.
The first chart is the backtest to November 20, 2020 and the second is to December 31, 2019.
As you can see the equity chart for the TQQQ strategy until December 31, 2019 has been very strong.
In addition to the equity chart, Amibroker generates backtest statistics that tell a lot about the performance of the strategy.
I will explain a couple of the key metrics that are most important when analyzing systems.
Please ignore the two columns in the middle of the backtest report. The ‘Long’ column is the same as the first column, and since the system does not go short the second column is not uses.
The last column is interesting, because it shows how a buy and hold in the S&P500 index would have performed. That is important to have in order to compare how the TQQQ Trading System has performed.
If a TQQQ ETF trading system cannot outperform the S&P500, then it would be better to just buy the SPY and move on.
Description of Statistics
- Net Profit: Ending Capital – Initial Capital
- Exposure %: Market exposure of the trading system, or in other words, how often the system was in a trade.
- Net Risk Adjusted Return %: The strategies net profit adjusting for the risk (Exposure).
- Annual Return %: The compound annual return (CAGR).
- Risk Adjusted Return %: The strategies annual return adjusting for the risk (Exposure).
- Winners: The number and percentage of winning trades during the backtest period.
- Avg. Bars Held: Average number of days a trade was held in winning trades.
- Losers: The number and percentage of losing trades during the backtest period.
- Avg. Bars Held: Average number of days a trade was held in losing trades. Note: The number of days a losing trade is held is less than a winning trade. This is good as the system lets winning trades run and gets out of losing trades quicker.
- Maximum trade drawdown: The largest peak to valley decline experienced in any single trade. The lower the better. Note: Notice how the trade drawdowns are lower for the TQQQ Trading Strategy compared to the S&P500 trade.
- Maximum trade % drawdown: The largest peak to valley percentage decline experienced in any single trade. The lower the better.
- Maximum system drawdown: The largest peak to valley decline experienced in portfolio equity. The lower the better. Note: Notice how the system drawdowns are very similar for the TQQQ Trading Strategy and the S&P500 trade. That is very positive, as a buy and hold in the TQQQ has seen drawdowns of 60% in the past. This system manages that risk.
- Maximum system % drawdown: The largest peak to valley percentage decline experienced in portfolio equity. The lower the better.
- Recovery Factor: It is the ratio of net Profit and maximum system drawdown. In other words, how quickly the system recovers from drawdowns. Higher the better. Note: Notice how the recovery factor is better for the TQQQ Trading Strategy than the S&P500 buy and hold.
- CAR/MaxDD: Compound Annual % Return divided by Maximum system % drawdown. The higher the better. Note: This factor and the RAR/MAXDD are the most important factors.
- RAR/MaxDD: Risk adjusted return divided by Maximum system % drawdown. The higher the better.
- Sharpe Ratio of trades: Measure of risk adjusted return of investment. Above 1.0 is good, more than 2.0 is very good.
Summary: Key Trading Strategy Takeaways
I think it is easy to see that trading the TQQQ ETF using the TQQQ Trading strategy has strong backtested performance. I encourage you to make your own assessment, however a couple of key takeaways that I have are:
- The risk adjusted return divided by the maximum drawdown (RAR/MaxDD) is very positive compared to the S&P500 buy and hold trade. The system manages risk well, and maximizes return within that risk.
- The average bars held for winning trades is higher than for losing trades, meaning that the system holds winning trades longer and cuts losing trades short. That is a good quality of any trading system.
- The Annual return of 20.91% handily beats the S&P500. And when factoring in risk, the system provides better returns when factoring the risk of the system.
- The drawdowns (both trade and system) are comparable, if not better, than a buy and hold in the S&P500.
- Finally, the Sharpe Ratio is very strong with a number close to 3 (above 2 is considered very good).
I trade the TQQQ Trading Strategy and specifically the TQQQ ETF because of these results. Of course, no one knows what is going to happen in the future.
As traders all we can do is do research and choose a strategy that we believe will give us a statistical edge, and then stick with that system.
It does not mean you need to go all in – I recommend only making the TQQQ Trading Strategy a small percentage of an overall portfolio. Based on the results above, even a small portfolio percentage can make a huge difference to a portfolio value in the future.
If you want to learn more about the TQQQ Trading Strategy and how you can learn to trade this system, please check out the eBook below.
Disclaimer: The information provided on this site is for education purposes only. The author is not a registered financial adviser and the ideas discussed on the site are just trading analysis and not recommendations. Robotic Investing doesn’t endorse any of the comments that might appear on the discussion threads. There is no guarantee for those comments to be accurate. By reading this site you automatically agree that Robotic Investing is not responsible for any of your trading decisions. Remember not to risk money that you cannot afford to lose. RoboticInvesting.com and all its products are Copyright© by Robotic Investing and property of Robotic Investing. All Rights Reserved.