The document discusses back testing strategies on Netflix (NFLX) stock and the Nasdaq index. It finds that buying and holding NFLX would have yielded an 89% return. Back testing the Nasdaq using a 20-day simple moving average strategy would have resulted in a total profit of $2.4 million compared to $49k for buy and hold, with lower drawdowns. A 50-day/200-day crossover strategy on the Nasdaq performed well with a maximum drawdown of only 20% and total profit of $501k.

1. S
Back testing strategies
on NFLX and Nasdaq
BY:
Mitchel D Fahey

2. What is Back Testing?
S -Back Testing is an important
investigation of the history of a
particular equity, index, commodity or
asset class.
S It is a way of doing very in depth
research into the history of how an
underlying security trades with
regards to parameters that a user sets
up
S You take historical data by: daily
prices, weekly prices, or monthly
prices. You then go back as far as
possible and get the actual data for
the underlying security that one would
want to trade or test.
S The user then picks key metrics that
they want to test for. The user may
use simple moving averages such as:
20-day, 50-day, 200-day simple
moving averages, or exponential
moving averages. Then you test these
ranges in a data series using excel or
through a computer programming
algorithm.

3. Why is it Important and Pros
and Cons of doing it
S We need to see how the underlying security
performs in different economic scenarios as new
ones are always arising and business cycles are
always going to: start, end, or currently going on.
S We need to understand how geo politics, currency
issues, commodity prices and a whole bunch of
other factors has had an impact on the underlying
security throughout all of history. If back testing is
not done we will have no idea, at all, on how the
security may react to these scenarios going into the
future.
S PROS
S It will provide a general sense of price reaction
history in the underlying security when economical
factors or political factors present themselves
S It allows investors the chance to come up with a
theory or trading strategy that they believe will be
successful and actually map it out to see if it worked
in the past, which may give some encouragement to
go ahead with the strategy.
S CONS
S Even though a strategy may work well in a back
testing model does not mean, in any circumstances,
that it will for sure work in the future. There are no
repeat days or exact same circumstances in the
market, so an entry and exit strategy should be well
thought out before going forward with any trading
strategy.
S MUST be careful not to fit historical data to justify
parameters, MAY want to have parameters in place
first

4. Back Testing NFLX
Buy open and sell close
for its history
S Would have made a return of
around 89%
S Very good and still missing
some key ups and (downs)
from after market and pre
market
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1
272
543
814
1085
1356
1627
1898
2169
2440
2711
2982
$$$
NFLX Investing $1,000
Series1

5. Back Testing NFLX
-100
-50
0
50
100
150
200
Series1

6. NFLX Backtesting
S Found that Investing $1,000 on a specific
day, Friday was the worst as we would
end up with $244.13
S Investing on Thursday vastly was
superior to all others where we would
end up with $12,220 vs just investing in
NFLX with this pattern would yield us
around $5,160
0
500
1,000
1,500
1
52
103
154
205
256
307
358
409
460
511
562
613
$$$$
NFLX Investing on Friday
Series1
0
2,000
4,000
6,000
8,000
1
272
543
814
1085
1356
1627
1898
2169
2440
2711
2982
$$$
NFLX Investing $1,000
Series1
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1
45
89
133
177
221
265
309
353
397
441
485
529
573
617
$$$$
NFLX investing on Thursday
Series1

7. More on NFLX
S Thursday was the only day that actually out performed
NFLX just buying open and selling close every day.
S Every other day did much worse and two of the days we
would have lost a lot of our investment

8. Nasdaq
By above 20 day SMA,
short below 20 day SMA Buy and hold the index
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
1
745
1489
2233
2977
3721
4465
5209
5953
6697
7441
8185
8929
9673
10…
20 Day SMA
20 Day SMA
$0.00
$10,000.00
$20,000.00
$30,000.00
$40,000.00
$50,000.00
$60,000.00
1
621
1241
1861
2481
3101
3721
4341
4961
5581
6201
6821
7441
8061
8681
9301
9921
10541
Buy Index
Buy Index

9. More on 20 day
S Total Profit of $2,472,178 vs
$49,077
S Geomean Return of 19.3% vs
9.3 %
S Max drawdown of 47.1% vs 78%
S 6,145 Winning Trades, 4,980 losing
trades
S Biggest loss of -$479,052
S Biggest gain of 346,933
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
1
745
1489
2233
2977
3721
4465
5209
5953
6697
7441
8185
8929
9673
10417
20 Day SMA
20 Day SMA

10. Nasdaq 20 Day EMA Back test
S Total Profit = $2,391,264.84
S Max Drawdown= 51%
S Geo Return= 19.2%
S Winning Trades= 6,143
S Losing Trades=4,982
S Biggest losing Trade= -$476,264,31
S Biggest Winning Trade= $349,032.720
1000000
2000000
3000000
4000000
5000000
6000000
1
621
1241
1861
2481
3101
3721
4341
4961
5581
6201
6821
7441
8061
8681
9301
9921
10541
20 Day EMA
20 Day EMA

11. Nasdaq 20 Day EMA/SMA
S Profit = $31,245.65
S Yes Trades= 5913
S No Trades= 5212
S This is a lot higher than two previous
S Max drawdown of 56%
S Geo Return=8.2% - lower than just Long Nasdaq
S Losing trade = -$6,317.65
S Winning Trade= $ 4,772.34
0
10000
20000
30000
40000
50000
60000
70000
1
859
1717
2575
3433
4291
5149
6007
6865
7723
8581
9439
10297
20-Day EMA/20-Day SMA
20-Day EMA/20-
Day SMA

12. Nasdaq-By 50 Day, Sell on
Close when 200 Day crosses
above
S Total profit = $501,471.79
S Winning Trades= 5,400
S Losing Trades= 3,504
S Lowest number of losing trades of all models tested
S No Change = 2,042
S Maximum Drawdown=20%
S Lowest of all tested
Geomean Return=15.3%
Biggest losing trade= -$915.82
Largest winning trade= $1,208.44
$0.00
$100,000.00
$200,000.00
$300,000.00
$400,000.00
$500,000.00
$600,000.00
1
784
1567
2350
3133
3916
4699
5482
6265
7048
7831
8614
9397
1018050/200-day MA
200-day MA

13. Nasdaq Summary
S Buy and hold
S Biggest Loss= -$3,554.90
S Biggest Gain= $3,248.30
S Drawdown=-78%
S Return=9.3%
S Best from back testing
S 50-day/200-day strategy
drawdown =-20%
S 20-day SMA Return= 19.3%
S Total Profit = $2,472,178 from 20
day SMA
S Lowest Return = 20 day EMA/20
day SMA 8.5% lower than buy
and hold

14. Nasdaq Summary
S I learned that back testing and
following a moving average can
pay off in a big way
S Having a simple strategy such as
going long 20 day SMA, and
shorting below level paid off in a
HUGE way
S All strategies avoided as big of a
drawdown as Buy and Hold
S Having more signals that are
closer together does NOT
necessarily give better return
S 20 Day EMA/SMA provided
lower return than buy and
hold and would have to pay
comissions
The 50 Day/200 Day strategy
gave us a low drawdown and big
return and would have had to
make less trades

15. Different Strategies for Hedge
Funds
S Equity Long-Short
S Hedge Funds take both long and
short positions in equities and
etf’s
S This is the most common type of
hedge fund
S Jim Cramer of Cramer-Berkowitz
and Doug Kass of Seabreeze
partners.
S Short Only Hedge funds
S Not as popular, only focused on
securities that are believed to be
overvalued
S Jim Chanos of Kynikos
Associates
S Claims they manage $1 Billion
and they dig through financials to
find
S Companies that materially
overstate earnings
S Unsustainable or operationally
flawed business plan
S Engaged in outright fraud.

16. More Hedge Fund Strategies
S Activist Hedge Fund Manager
S Buy big stake in a company and
force management to appoint
board members that will be
share holder friendly
S Becoming more popular
S Carl Ichan, David Einhorn, Bill
Ackmen
S Usually involves trying to get
company to do buybacks or
increase dividends
S Also mergers and sales.
S Fixed Income- Bill Gross,
trading bonds from around the
world