Berkshire Hathaway Overnight Trading Strategy
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Statistically Valid
(4)
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Ease of Use
(5)
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Simple To Master
(5)
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Robustness
(4)
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Durability
(3)
Summary
The Berkshire Hathaway Overnight Trading Strategy is yet another example that profitable trading systems can be built with the most simple of rules.
Incredibly, by looking at the relationship of only 2 bars, we can see a clear and exploitable trading edge emerge.
Trading does not have to be hard. Ditch the obfuscated mish-mash of esoteric trading indicators and focus on simplicity. This strategy is an example of what even the dullest dullard (me) can create with a little effort.
Download it, study it, use it. Twist it into something of your own creation. Make it better. Make it unique to you.
One of the great things about learning how to backtest and program trading strategies is the exhilarating sense of independence, that feeling of ‘doing things yourself’.
In many ways, backtesting and programming trading strategies is very much an artistic endeavor. I am no artist. However, once you learn how to work with raw financial data, you begin to see raw financial data as a sort of artistic raw material. Like clay, or paint, or stone. Something where you can apply your own hand and ‘something’ will emerge.
With a little work and effort, some nice things can begin to take shape. Things that are of your own creation. Things you can believe in, and feel proud about discovering and creating. And most importantly, have the faith and courage to execute.
Today, I want to talk about a stupid little stock trading strategy that trades only Berkshire Hathaway (B shares).
For those not familiar, Berkshire Hathaway is the publicly traded holding company for the world-famous investor, Warren Buffett. Every stock held within Berkshire Hathaway is pretty much ‘the creme de la creme’ of the stock market. Warren is no fool. For the past 60 years, this old guy has beaten the hell out of the stock market averages.
Yes, a great strategy would be to simply buy Berkshire Hathaway and hold it forever. But we are traders and insist on doing things the hard way. In short, we want to buy Berkshire Hathaway at the best possible short-term price, and then sell it for a short-term profit.
Since betting against Warren Buffett is a fools’ errand, we are not interested in discovering some novel idea at shorting Berkshire Hathaway. We just want to pick the most opportune times to buy and sell in the shortest possible window of time. Hopefully with a profit. That’s the subject of today’s article. Let’s get started.
Tools Used and Time Frame
For this trading system, we are going to be using Trade Navigator. This is the platform that I personally use. Why? Because its stupid simple to learn. And the support is the best in the business. If you need help creating a trading strategy, you can pick up the phone and one of the staff will screen share your thoughts into workable code.
Trade Navigator uses a programming language called TradeSense. Basically, it’s an extremely dumbed down computer language that was created for people like me–a complete fucking idiot with no High School diploma.
Another thing I like about Trade Navigator is that the data automatically updates every evening. It’s on your hard drive. And once you have the data, you can manipulate the raw data into just about anything you can imagine.
For this particular trading strategy, we are going to take raw, intraday Berkshire Hathaway (B shares) and create our own custom bar period.
This strategy is going to use only 130-minute bars. Why 130- minute bars? First, let me say that there is nothing magical about 130-minute bars. No Fibonacci Vortex, Gann Secret Square, or Elliot Wave mumbo jumbo about a 130-minute bar.
The 130-minute bar simply represents 1/3 of the trading day. There are 390 minutes in the trading day (for stocks). And so I wanted to look for simple patterns that emerge from only 3 bars that form during the day.
The Set-UP and Entry
Remember, there are only 3 bars for each trading day. Just three bars! Each bar represents 130 minutes of time.
For Bar #1, the very first bar, we want a UP CLOSE.
For Bar #2, the second bar, we want a UP CLOSE.
That’s it! We just want two consecutive UP CLOSE bars. If we get this specific condition…then on the open of the 3rd bar, we enter our Long trade.
I told you it was stupid simple.
The Exit
Ok, now that we are long Berkshire Hathway, when do we get out of this trade?
We simply exit the trade on the open, the next morning. Yep, we hold the trade overnight!
Why hold overnight? Because as you will soon see, and for whatever reason…when Berkshire Hathaway has a bullish day, the odds are really good that the momentum will carry over into the Asian and European trading session.
Remember, Berkshire Hathaway is sort of a proxy that many people will view as the overall health of the US stock market. It holds what many consider to be the best stocks available. We want to take advantage of that momentum, and then dump the stock, the next morning.
How does this incredibly stupid and simple trading strategy perform? Let’s take a look.
The Results
For the following results, I tested January 2003 through March 2018. For each test, we are only trading with 100 shares of stock.
As you can see, for the past 15 years, this strategy just keeps on grinding higher and higher. What I find most impressive is the Profit Factor of 2 is really, really, really good for a strategy that has over 800 trades within the sample period.
Anytime you can find a Profit Factor > 1.8 over a sample size of 400 trades…you have a really nice pattern.
So now that I have published this pattern, you can reasonably expect that many traders are going to ‘jump on the bandwagon’. Which is OK. Berkshire Hathaway has a massive daily volume of between 1 to 2 million shares. So there is plenty of room before the edge is rubbed out.
Another thing I like about this pattern is the small drawdown of $1,300. However, when determining a stop loss for this particular system, what you really want to look at are the performance statistics: Largest Drawdown in Win (-$354), and Largest Loss (-$344). So set your stops outside of this range.
For those that like to drill even further (I don’t), you can see that the average drawdown for each winning trade is a reasonable (-$24) and Average Run Down in Loss is not a heart stopper (-$60).
Improving the strategy
The sample size of over 800 trades is quite large. Although you can trade it ‘out of the box’, there are also a few minor adjustments that greatly improve performance. Without over curve fitting. In my own derivation, a tiny little filter increases the average trade to $42 with a win rate of 85%. Really good. Am I going to tell you the ‘secret sauce’? Nope. You need to get your hands dirty.
Hint: add a VIX volatility filter.
Get your hands dirty. The gold is in the dirt. But you need to dig it out.
Wrapping things up
From reading this strategy, you should be able to see the ridiculous simplicity of this. It’s stupid simple.
Next, you should let your imagination take root and start to imagine alternative scenarios. For this strategy, we are only looking at 2-bars. But what happens if you explore all the possible scenarios for the complete 3-bars (130 minutes each)?
And what about testing each of these scenarios over a large universe of stocks, ETF’s, futures, or Forex? There is so much to explore.
Thanks for reading. Once again, you can download a free copy of Trade Navigator by clicking on the following link.
Free Trial of Trade Navigator.
Once you have Trade Navigator setup. Then download the Berkshire Hathaway Overnight Strategy and import into Trade Navigator. The following link is a free download of the strategy.
No, I am not being compensated by Trade Navigator. I just want readers to succeed. And this platform, combined with a little effort, will shorten the learning curve.
In your example, the open equity cannot be zero if account size required is $22,000; it has to be $22,000. So in a nutshell you took $22,000 to $37,000 in 15 years, for a Compound Annual Growth Rate of 3.53%. If you subtract inflation you’re not left with much; your broker otoh will thank you very, very much.
BTW, if you had just bought 300 BRK-B shares back in 2003, which would have cost you about $18,000, you could have sold them today for about $58,000, for a Compound Annual Growth Rate of 8.11%.
So yeah, your strategy sucks. Unless you’re into stressing over a few pennies every day and enriching your broker.
Actually, with your example, you would have to tie up capital for 15 years and experience a 60% drawdown. No room to maneuver and opportunity cost.
With my example, you would tie up the same capital for an average of 6 hours per week–maximum. And worst intraday drawdown is 12%. Less exposure = less risk.
Furthermore, if you were to simply reinvest your profits from this system into additional shares, then your total balance would currently be $70k+ vs your $58k.
In my opinion, you might really help yourself by learning Monte Carlo simulation and money management regimes like Fixed Fractional position sizing. In my humble opinion, fixed fractional is great for stock trading systems because they increase position sizes when times are good, and decrease when times are bad. With standard ‘buy and hold’, as you recommend…are stuck in a ‘buy and hope’ type situation.
For me, I want low exposure time. And a consistently well-performing pattern.
Best wishes and much respect, Goagal.
Emmett, how do you position size on Trade Navigator? It doesn’t seem to have the capability to auto position size for you. Do you just enter that by hand each night?
I use a fixed amount or fixed share size.
I just checked the performance on that strategy, it just keeps printing money.
Thank you!!
Emmett, I love your blog. Please keep up the fantastic work. Building and backtesting systems is a passion of mine but I’ve only found a few strategies that actually work in real-time.
I just signed up for Trade Navigator… would it be possible to try some of your pre-made systems? I’d love to play around with the mid-point strategy, Larry Connors strategies, Emini scalping, and Heikin-Ashi systems you’ve built.
Thanks again for your time and hard work