Turn Of The Month Effect | Stock Market | Radovan Vojtko | Quantra Courses

This video is the preview of our brand-new course on Event Driven Trading Strategies which is available right now at a FLAT 60% just-launched discount: https://quantra.quantinsti.com/course/event-driven-trading-strategies Timesmap: 00.16 - 01.30 - What is turn of the month effect? 01:31 - 02:41 - Why does this strategy work? 02:41 - 03:40 - How to enhance this strategy? Welcome to this video on the turn of the month effect. After completing this, you will be able to explain rationale behind turn of the month anomaly, define the entry and exit points of the strategy, and finally, enhance the strategy to improve performance. The Turn of the Month is a well-known effect on stock indexes. It is one of the most popular and simplest calendar trading strategies. The anomaly is based on an observation that prices usually increase during the last four days and the first three days of each month. Distinct researches identified this effect for various periods. Both in the Dow Jones Industrial Average and also in the S&P500 index. Therefore the strategy is widely accepted by academics and popular among practitioners because of its simplicity and profitability. Like many other calendar strategies, the strategy is not constrained to US equities but works on international markets as well. Let’s take a look at an actual performance statistic of various days in an average calendar month. This chart is based on the daily performance data of SPY ETF (SPDR S&P 500 fund) that tracks the performance of the S&P 500 stock market index. SPY ETF fund is the largest ETF in the world. As we can see, historically on average, the first day of the month is the most profitable day. We can see that other days at the beginning of the month are also profitable. Why does this strategy work? The reason for the functionality is not risk-based. According to the literature, the effect may be explained by the regularity in payment dates in the United States. Investors receive a preponderance of compensation from employment, dividends, and interest at month-ends. Consequently, as investors seek to invest these funds, equity prices are pushed up. Therefore, based on this short statistic, we can suggest a simple version of The turn of the month strategy, which buys an equity index on close at the end of the month and sells it on close of the first day in the following month. As the chart of the strategy for the years 1993-2019 shows, the turn of the month is profitable, and this pattern is still alive even in the present. One dollar invested in 1993 would be more than doubled to 2.12 dollars in the year 2019, with a yearly performance of 2.83% Such a strategy has a maximal drawdown of -11.96%, which results in the performance-to-drawdown ratio of 0.23. How can we enhance this simple strategy? The suggested strategy is trading an equity market and is, therefore, susceptible to negative performance during the bear market periods. We can enhance this strategy by not using this strategy during equity market downturns. The trend factor is notoriously used to protect the stock portfolio and to obtain lower drawdowns during bear markets. Therefore we can use, for example, the 200-days simple moving average as a trend-following filter. The strategy is active only if the actual price of the index is above its average, the strategy will remain perfectly flat during the crisis. As the chart of the strategy shows, the trend-following filter works well. The amended strategy has a yearly performance of 2.92%. Such a strategy has a maximal drawdown of -5.03%, which results in the performance-to-drawdown ratio of 0.58 That’s all for this video. Coming up next is the implementation of the simple and enhanced strategy in Python Quantra is an online education portal that specializes in Algorithmic and Quantitative trading. Quantra offers various bite-sized, self-paced and interactive courses that are perfect for busy professionals, seeking implementable knowledge in this domain. Find more info on - https://quantra.quantinsti.com/ Like us on Facebook: https://www.facebook.com/goquantra/ Follow us on Twitter: https://twitter.com/GoQuantra

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