BP–373,030 –0.13 –0.32 –684,225 118 37 1355.75–321,058 –18,323 38 17RD/SC–769,393 –0.26 –0.67 –1,093,412 118 36 1080.47–617,025 –20,152 37 19UN/ULCommodity XAU/GC–619,005 –0.13 –0.38 –895,148 103 34 538.02–11 32,110 –25,783 47 2042 701.80545,249 0.09 0.32 –354,964 88952,168 –27,156 57 18XOI/CLvs. StockAverage –40,673 –0.04 –0.07 –676,424 9938 674.93–20 44,390 –27,321 49 195,000,0004,000,0003,000,0002,000,0001,000,0000–1,000,000–2,000,000
–0.100.841.00
Dec-01
Portfolio Statistics–1,220,189Sharpe ratio :–5,606,897Correlation to breakout :–0.10Correlation to 10-40 MA :
Jan-01
Jan-00
Jan-98
Jan-97
Jan-96
Jan-95
Jan-99
Net Profit :Drawdown :K-ratio :
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Equity
Strategy Name:Parameters :Description :Run Dates :
© 2002 Lars Kestner - All Rights Reserved
FIGURE
9.20a
Moving Average Crossover Strategy Applied to Relative Value Markets. The Moving Average Crossover does not generateprofits on our relative value markets.
9.20b
Breakdown Statistics (Relative Value)
AverageSharpe Ratio0.010.28–0.850.150.57–0.23–0.03
AverageAverageMax DD Num Trades100–743,77489–325,103133–1,421,54088–584,93481–291,140105–738,25196–625,056
1991
K-ratio0.720.38–0.42–0.290.11–0.21
1992
Sharpe Ratio2.241.54–0.85–1.310.57–0.38
1993
Year199619971998199920002001
1994
1995
Year
1996
1997
2000
2001
© 2002 Lars Kestner - All Rights Reserved
1999
PercentProfitable52.08%42.25%37.41%38.35%29.13%26.45%
Num. ofNumber of ProfitableLengthWindows Windows1 Month144753 Months142606 Months1395212 Months1335118 Months1273724 Months12132
1998
Avg. BarsLoss20191621181819
Average Avg. BarsAverageWinLossWin46,999–27,5024767,146–31,90954–20,6123615,64454,824–29,3635573,789–31,6166136,174–26,1044742,139–26,47052Profitability Windows
Avg. ProfitPer Contract1187–957510–4–1
Sharpe Ratio–1.12–0.44–0.73–0.340.00–0.57
Average% Win37433139433738
Net ProfitK-ratio–1,254,119–0.32–408,494–0.36–960,937–0.07–472,557–0.373,833–0.10–690,205–0.19Net Profit by Year
Performance Breakdown by Year
AverageK-ratio–0.040.12–0.510.040.17–0.09–0.02
10 day/40 day Dual Moving Average Crossover10 day average, 40 day averageEnter long when 10 day average crosses above 40 day average, short on cross below1/1/1990-12/31/2001Breakdown by Market Sector
Moving Average Crossover Strategy Applied to Relative Value Markets. The Moving Average Crossover does not generateprofits on our relative value markets.
FIGURE
1990
Net Profit2,905,0261,245,467–789,412–1,058,896528,364–267,371
3,500,0003,000,0002,500,0002,000,0001,500,0001,000,000500,0000–500,000–1,000,000–1,500,000
Year199019911992199319941995
MarketAverageNet ProfitSectorRates55,964Credit754,249Volatility–1,209,060Commodity313,735Stock Index1,124,456Stock Pairs–344,905Stock/Comm. –36,878
System Name :Parameters :Description :Run Dates :
Net Profit
274
CHAPTER 9 New Ideas of Markets
275
Trading Strategy Evaluation (Relative Value)80 day momentum80 day momentum triggers entries and exitsBuy if today's close > close of 80 days ago; exit if today's close < close of 80 days ago1/1/1990-12/31/2001#Avg.Avg. Avg.ofSharpe%Avg.Profit Avg.Avg. Bars BarsMarketNet Profit K-ratio Ratio Max DD Trades Win hrs (000) Per Con. WinLoss Win Loss2's-10's1,598,921 0.22 0.74 –304,380 126 48 337.9930,429 –15,267 34 920Yield2's-5's1,081,213 0.07 0.56 –505,268 150 49 452.0423,513 –17,712 26 11Curve510's-30's154,568 0.02 0.07 –528,680 139 48 530.6426,139 –22,141 31 1222-10-30 Fly152,731 0.00 0.08 –602,579 162 44 531.3626,083 –20,317 29 90Swap spreads 182,470 0.05 0.08 –381,030 116 42 8.09207 28,971 –18,285 40 16CreditHigh yield 1,291,257 0.10 0.39 –327,797 132 37 177.1556,061 –17,372 40 1256SpreadsVIX–2,837,330 –0.68 –1.70 –2,868,450 338 33 9.55–878 7,736 –16,368 99VolatilityC/W761,821 0.07 0.35 –467,571 153 43 632.1034,167 –17,579 32 118CommodityS/BO194,277 0.05 0.09 –417,228 130 42 1057.0233,132 –21,153 36 151S/SM–285,581 0.00 –0.15 –568,181 127 33 1317.9432,758 –19,613 47 12–2GC/SL–155,902 –0.04 –0.09 –580,746 191 45 894.2217,204 –15,888 23 10–1SPX/NDX397,073 0.05 0.18 –322,208 111 40 940.0738,972 –19,116 52 114StockSPX/RUT470,634 0.08 0.20 –420,990 93 38 1641.6948,073 –22,318 59 173IndicesBSC/MER –607,555 –0.16 –0.38 –1,033,974 224 45 482.4113,234 –16,106 18 9–6StockCVS/WAG –1,156,259 –0.28 –0.60 –1,490,565 194 35 519.41Pairs–14 17,955 –20,379 20 12DAL/AMR –1,948,703 –0.41 –0.97 –1,977,362 192 31 689.68–15 15,337 –21,580 20 13DD/DOW –1,116,598 –0.31 –0.68 –1,257,664 216 35 613.8216,836 –16,988 19 11–9FNM/FRE –1,487,381 –0.50 –0.84 –1,512,468 273 40 803.1511,405 –16,595 13 9–7GM/F56,101 –0.04 0.03 –623,073 160 43 603.7723,377 –17,605 30 100KO/PEP–722,894 –0.07 –0.41 –813,292 199 37 627.6120,310 –17,489 21 11–6MOT/TXN–208,515 –0.01 –0.12 –638,139 173 39 372.5223,565 –16,785 32 8–3MSFT/INTC 331,365 0.08 0.17 –284,276 137 45 442.4932,612 –22,227 36 115PFE/MRK–596,030 –0.11 –0.29 –881,903 179 41 635.7416,926 –18,237 23 12–6VZ/SBC–1,598,256 –0.25 –0.97 –1,686,266 203 32 735.05–11 15,384 –18,828 21 12WMT/HD –1,001,829 –0.22 –0.58 –1,066,840 242 41 505.4612,121 –15,603 16 10–8XOM/BP–397,610 –0.07 –0.22 –804,598 166 34 712.0225,474 –16,583 31 11–3RD/SC–1,170,134 –0.42 –0.78 –1,249,398 314 46 1335.609,005 –14,965 12 8–3UN/UL–1,635,764 –0.44 –1.16 –1,698,036 403 41 1079.298,963 –12,940 9–46XAU/GC–740,196 –0.14 –0.44 –923,104 191 41 536.6215,446 –17,333 23 11–7CommodityXOI/CL–321,520 –0.09 –0.18 –510,848 171 37 686.3222,517 –17,221 30 10–3vs. StockAverage –377,188 –0.12 –0.25 –891,564 187 40 663.69–22 23,457 –18,020 28 114,000,0002,000,0000–2,000,000–4,000,000–6,000,000–8,000,000–10,000,000–12,000,000
–0.920.640.57
Dec-01
Jan-00
Portfolio StatisticsNet Profit : –11,315,626Sharpe ratio :Drawdown : –13,187,360Correlation to breakout :K-ratio :–0.39Correlation to 10-40 MA :
Jan-01
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Equity
Strategy Name :Parameters :Description :Run Dates :
© 2002 Lars Kestner - All Rights Reserved
FIGURE
9.21a
Momentum Strategy Applied to Relative Value Markets. Like other trend following strategies, the Momentum Strategy doesnot produce profits on relative value markets.
9.21b
1991
K-ratio0.300.02–0.59–0.73–0.10–0.38
1992
Sharpe Ratio0.720.35–2.06–2.42–0.22–1.35
1993
Year199619971998199920002001K-ratio–0.57–0.45–0.40–0.83–0.22–0.16
1994
1995
Year
Net Profit by Year
Net Profit–1,815,839–614,527–2,362,500–1,492,126–114,684–1,078,488
1996
1997
Sharpe Ratio–1.36–0.83–1.68–2.10–0.13–0.97
Avg. ProfitPer Contract7131–87813–6–5
1998
2000
2001
PercentProfitable40.97%27.46%22.30%14.29%10.24%5.79%
© 2002 Lars Kestner - All Rights Reserved
1999
Num. ofProfitableWindows59393119137
Average Avg. Bars Avg. BarsLossLossWin3011–18,859–17,82940149–16,3689–18,5583412–20,7175514–17,5272110–17,2772610Profitability Windows
Number ofWindowsLength1441 Month1423 Months1396 Months13312 Months12718 Months12124 Months
AverageWin26,54142,5167,73629,31543,52217,50018,982
Momentum Strategy Applied to Relative Value Markets. Like other trend following strategies, the Momentum Strategy does not produce profits on relative valuemarkets.
FIGURE
–3,000,000
500,0000–500,000–1.000,000–1,500,000–2,000,000–2,500,0001990
Net Profit1,072,852274,104–1,619,518–2,120,367–165,300–1,282,332
Performance Breakdown by Year
Average AverageAverageNum Trades % WinMax DD14447–485,22712440–354,414–2,868,45033833–508,43215041–371,59910239–1,134,52421839–716,97618139
Breakdown Statistics (Relative Value)
80 day momentum80 day momentum trigger entries and exitsBuy if today's close > close of 80 days ago; exit if today's close < close of 80 days ago1/1/1990-12/31/2001Breakdown by Market Sector
AverageAverage AverageK-ratio Sharpe RatioNet Profit746,8580.080.36736,8640.070.24–2,837,330 –0.68–1.70128,6540.020.050.19433,8540.07–884,004–0.21–0.52–530,858–0.12–0.31
1,500,0001,000,000
Year199019911992199319941995
MarketSectorRatesCreditVolatilityCommodityStock IndexStock PairsStock/Comm.
System Name :Parameters :Description :Run Dates :
Net Profit
276
CHAPTER 9 New Ideas of Markets
277
RSI rose above 65. Consequently, we entered short. In mid-July, after choppy priceaction, the spread market began to decline and the RSI fell below 35. At the pointwe closed our short position and entered long.The performance of a 14-day RSI applied to our relative value markets(Figures 9.24a and 9.24b) is even better than the 14-day Slow %K stochastic. The14-day RSI strategy is profitable in 8 of 12 years, generating a Sharpe ratio of 0.34and a K-ratio of 0.16. Eleven out of 15 stock pairs are profitable.Difference from 100-Day Moving AverageUsing the traditional strategy above, the results show that most of our 30 relativevalue markets respond poorly to trend-following strategies, and all of which—channel breakout, moving average crossover, and momentum—lost money. Thetwo countertrend strategies—Slow %K stochastics and RSI—made money. Thisfeeds into our theory that using countertrend and trend exhaustion strategies willperform well when trading two or more markets that are natural substitutes.Now we introduce the first of two new strategies designed to take advantageof this mean reversion in relative value markets. In countertrend trading strategies,we want to enter short positions when prices rise quickly. When prices fall quickly, we want to enter long positions. The first strategy we introduce normalizes thedifference between today’s close and today’s 100-day moving average. First, wesubtract the 100-day moving average from today’s close. Next, we divide this valueby the standard deviation of the past 100 price changes, to normalize this valueacross all markets. The result is a statistic that measures deviation from a longterm mean.100-day Statistic = (Close minus 100-day moving average of closes) / 100-daystandard deviation of price changesLong entries are entered when the 100-day stat falls below –2.5, while shortpositions are established when this statistic rises above 2.5. Long entries are exited when the 100-day stat rises above zero, and short entries are exited when the100-day stat falls below zero.We apply this trading strategy to the VIX in the chart in Figure 9.25. As theVIX rises above its 100-day moving average in late October, the 100-day statrises above 2.5 and we enter short. As the market retreats in late November, the100-day stat falls below zero and we exit our short position. The decline continues through mid-February, when the 100-day stat falls below –2.5. At this pointwe enter long, exiting approximately one month later when the 100-day stat risesabove zero.Our creativity and thought process seems to pay off in this new strategy(Figures 9.26a and 9.26b). Our new strategy produces a Sharpe ratio of 0.49 and aK-ratio of 0.24, making money in 8 of the 12 years tested. Strongest performance
Trading Strategy Evaluation (Relative Value)Strategy Name :Parameters :Description :Run Dates :
14 day Slow %K stochastics14 days in stochastic calculationEnter long when %K crosses above 20, enter short when %K crosses below 801/1/1990-12/31/2001Avg.Avg. Avg.#Avg.Avg. Bars BarsProfitof %SharpeAvg.Net Profit K-ratio Ratio Max DD Trades Win hrs (000) Per Con. WinLoss Win LossMarket–431,043 –0.03 –0.19 –802,730 134 63 331.63Yield2's-10's–525,580 –48,865 14 3412,939Curve2's-5's0.02 0.01 –564,970 130 65 448.12123,347 –43,260 15 38–243,842 0.01 –0.12 –584,754 140 60 562.6210's-30's–322,949 –39,003 13 34251,105 0.11 0.12 –436,515 138 67 550.232-10-30 Fly622,692 –36,438 15 34CreditSwap spreads –258,440 –0.08 –0.12 –952,000 156 699.20–163 20,243 –48,989 13 33–2,227,816 –0.15 –0.71 –2,433,675 114 59 161.89 –115 28,550 –85,831 14 43SpreadsHigh yield1,630,490 0.35 1.04 –196,700 151 70VolatilityVIX9.741,137 23,608 –18,472 14 33–1,436,564 –0.17 –0.68 –1,507,073 116 53 653.40CommodityC/W–19 25,006 –53,772 14 40126,292 0.03 0.06 –919,659 140 65 1034.15S/BO128,363 –50,229 12 381,308,262S/SM0.34 0.67 –301,258 138 70 1351.50729,461 –37,168 15 39–42,328 0.08 –0.02 –370,748 129 60 919.19GC/SL024,716 –37,096 14 39–848,315StockSPX/NDX–0.04 –0.43 –962,276 119 65 1039.21–725,355 –66,630 14 46–1,570,349 –0.25 –0.73 –1,809,982 119 58 1762.10IndicesSPX/RUT–725,862 –65,263 13 42762,514 0.14 0.52 –385,941 148 62 494.78StockBSCMER1024,575 –26,843 13 32Pairs91,830CVS/WAG0.01 0.06 –507,461 133 64 502.50223,449 –39,007 15 37–329,084 –0.08 –0.19 –691,774 141 61 716.94DAL/AMR–323,358 –42,409 14 33–310,596 –0.03 –0.18 –787,042 132 55 581.90DD/DOW–323,727 –33,680 15 33746,079 0.19 0.47 –486,780 146 67 813.01FNM/FRE621,864 –28,716 15 32–435,620 –0.08 –0.24 –843,491 137 66 611.91GM/F–521,885 –52,602 14 38817,982KO/PEP0.17 0.47 –362,845 148 70 616.67922,351 –32,879 15 34–66,903 –0.02 –0.04 –648,838 133 65 392.91MOT/TXN–123,642 –44,858 15 38–424,326MSFT/INTC–0.06 –0.21 –896,248 131 65 435.00–725,579 –56,471 13 41890,074PFE/MRK0.19 0.48 –419,406 142 68 631.871026,599 –36,188 14 371,670,054VZ/SBC0.59 1