69,9080.022000–0.36–213,2432001–0.03–0.47
AverageK-ratio–0.06–0.150.070.09–0.100.03–0.070.04
MACD Histogram Retracement Strategy Applied to Futures.
FIGURE
1990
AverageNet Profit–150,887–661,848270,713496,998–831,510180,433–137,88289,535
2,500,0002,000,0001,500,0001,000,000500,0000–500,000–1,000,000–1,500,000–2,000,000–2,500,000
Breakdown Statistics (Futures)
MACD histogram retracement12 day/26 day/9 day MACD; retrace 25% of extremeEnter long when MACD histogram retraces 25% of extreme move; opp. for shorts1/1/1990 – 12/31/2001Breakdown by Market Sector
MarketSectorFXRatesStockMetalsEnergyGrainsMeatsSofts
System Name:Parameters:Description:Run Dates:
Net Profit
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
200
Trading Strategy Evaluation (Stocks)
Net Profit:Drawdown:K-ratio:
FIGURE
Portfolio Statistics–8,034,651Sharpe ratio:–8,562,901Correlation to breakout:–0.18Correlation to 10-40 MA:
8.10a
MACD Histogram Retracement Strategy Applied to Stocks.
–0.48–0.45–0.55
Dec-01
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Equity
Strategy Name: MACD histogram retracementParameters:12 day/26 day/9 day MACD; retrace 25% of extremeDescription:Enter long when MACD histogram retraces 25% of extreme move; opp. for shortsRun Dates:1/1/1990 – 12/31/2001#Avg.Avg. Avg.SharpeAvg.of%ProfitAvg.Avg.Bars BarsMarket Net Profit K-ratio Ratio Max DD Trades Win hrs (000) Per Con. WinLossWin LossEnergySLB–169,672 –0.02 –0.09 –841,045 4245 16.02–184 67,710 –61,324 37 95XOM–6,223–0.06 0.00 -–583,485 2854 41.17–42 55,714 –67,968 108 97MaterialsAA–665,216 –0.14 –0.37 –761,440 9236 50.48–143 39,839 –33,526 46 20DD8,465–0.01 0.00 -–546,882 5661 21.4714 38,571 –58,838 45 67IP201,2360.03 0.11 –509,507 5163 17.92277 42,278 –57,857 54 65IndustrialsBA–373,0180.02 –0.21 -–488,841 5657 22.02–274 41,177 –68,964 47 61GE460,0430.11 0.24 –547,602 4459 68.76150 62,635 –65,276 55 85MMM159,1170.00 0.09 –734,533 4965 12.68379 40,854 –63,053 51 77ConsumerDIS–722,009 –0.13 –0.37 –947,942 5753 37.81–320 41,983 –72,155 39 6742 14.02 –1,865 39,392 –74,051 57 70Discretionary GM –1,222,947 –0.14 –0.65 –1,286,465 45HD168,4570.10 0.09 –508,517 6062 72.2858 47,965 –66,252 41 61WMT –612,302 –0.14 –0.33 –750,816 5452 42.95–240 40,207 –64,746 46 63ConsumerG695,8160.15 0.38 –381,739 5358 35.35324 57,638 –53,637 46 68KO366,4140.07 0.18 –523,927 5971 26.20237 42,606 –83,726 36 88StaplesMO–196,684 –0.02 –0.10 –611,443 4452 25.44–149 61,740 –75,586 57 79PG–401,719 –0.06 –0.21 –906,162 5256 20.87–390 40,697 –69,731 46 72Healthcare AMGN –319,4320.00 –0.12 –1,231,556 4457 66.58–105 75,600 –115,604 50 92BMY –302,541 –0.11 –0.17 –961,357 4257 35.30–172 50,582 –81,583 59 82JNJ–241,065 –0.05 –0.13 –910,205 5062 38.45–145 48,845 –94,346 45 85PFE622,9720.10 0.29 –497,763 4257 83.42182 77,023 –67,342 72 69FinancialsAIG287,2310.04 0.15 –559,293 6063 44.79115 50,849 –73,731 38 65FNM –266,435 –0.04 –0.15 –483,632 4657 27.47–220 42,235 –68,835 64 67MER –688,600 –0.21 –0.37 –1,003,952 6554 53.50–183 47,093 –76,211 28 66Information AAPL –139,090 –0.04 –0.07 –932,447 5145 18.58–169 62,407 –56,993 44 6765 455.69–31 50,865 –133,209 42 77Technology DELL –798,216 –0.08 –0.31 –1,678,553 54IBM221,0900.04 0.11 –510,533 6857 21.91198 51,284 –58,798 36 55INTC –1,599,992 –0.23 –0.67 –1,884,144 6151 135.81–183 45,514 –97,688 35 61MSFT 904,8290.18 0.39 –431,176 5659 77.11223 72,316 –61,826 43 66SUNW –1,689,733 –0.23 –0.79 –1,799,448 5147 218.29–151 45,142 –102,369 40 75TXN237,4310.03 0.10 –770,776 5859 95.8643 58,772 –73,351 38 72TelecomVZ172,2690.06 0.10 –628,309 4852 22.78183 57,661 –53,958 52 72IndicesSPX860,2270.19 0.44 –348,766 5362 2726.336 58,228 –50,271 46 71NDX –1,338,760 –0.32 –0.60 –1,504,852 5149 1894.29–13 51,096 –98,515 39 76–4 56,980 –104,614 28 52RUT –1,646,594 –0.20 –0.57 –1,679,545 7552 5521.67Average –236,313 –0.03 –0.11 –845,490 5356 354.80–76 51,868 –73,704 47 711,000,0000–1,000,000–2,000,000–3,000,000–4,000,000–5,000,000–6,000,000–7,000,000–8,000,000–9,000,000
© 2002 Lars Kestner – All Rights Reserved
201
8.10b
1991199219931994
Year
1995
AverageWin61,71240,23048,22242,38750,67063,01246,72655,18657,66155,435
Average Avg. Bars Avg. BarsWinLossLoss72–64,64696–50,074485151–65,76475–69,3014665–70,670467756–89,7198243–72,92666–83,4624067–53,9585272–84,4673866Profitability Windows
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Num ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable62–0.3543.06%1 Month144640.2145.07%3 Months14213951–0.1336.69%6 Months350.2826.32%12 Months13312719–0.7114.96%18 Months18–0.2814.88%24 Months121
1996
K-ratio–0.020.14–0.050.25–0.05–0.13
Net Profit by Year
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio–444,3121996–0.43–2.28281,8321997–0.13–0.14–252,022–0.061998–0.43329,0101999–0.06–0.28–1,136,280–0.332000–1.17–289,0242001–0.10–0.68
Average Average Avg. ProfitAverageAverageAverageK-ratio Sharpe Ratio Max DD Num Trades % Win Per Contract35–0.0449–113–0.05–712,265–605,94366–0.0453–0.095050610.04850.04–590,325–873,43554–0.0752–0.32–5925–605,818520.04590.0645–0.0258–60–0.03–900,22057–0.0758–96–0.12–682,292–1,143,86857–0.0555–0.18–10–628,309480.06520.10183–1,177,72160–0.1154–0.25–4
MACD Histogram Retracement Strategy Applied to Stocks.
FIGURE
1990
Net Profit–3,293,470–273,648–600,043–285,611–1,074,985–996,098
1,000,000500,0000–500,000–1,000,000–1,500,000–2,000,000–2,500,000–3,000,000–3,500,000
Year199019911992199319941995
Breakdown Statistics (Stocks)MACD histogram retracement12 day/26 day/9 day MACD; retrace 25% of extremeEnter long when MACD histogram retraces 25% of extreme move; opp. for shorts1/1/1990 – 12/31/2001Breakdown by Market Sector
AverageMarketNet ProfitSectorEnergy–87,948Materials–151,838Industrials82,047Discretionary –597,200Staples115,957Healthcare–60,017Financials–222,601Info. Tech.–409,097Telecom172,269Indices–708,376
System Name:Parameters:Description:Run Dates:
Net Profit
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
202
FIGURE
8.11
Divergence Index Strategy Applied to Phillip Morris.
Divergence Index strategy performance is strong, especially on futures markets (Figures 8.12a and 8.12b). With a Sharpe ratio of 0.73 and a K-ratio of 0.26,futures markets generate profits in 11 out of 12 years tested. The strongest markets are not those typically associated with trend-following strategies. Stockindices, grains, and softs are the strongest performing sectors. When tested onstocks (Figures 8.13a and 8.13b), profits are generated in 7 of the 12 years tested.Health care, technology, and stock indices perform the best. Unlike typical trendfollowing strategies, performance of the Divergence Index does not deteriorate tothe same extent over time. This property bodes well for future performance.Moving Average Confluence MethodOptimization is an important enough topic that half of an entire chapter has beendevoted to its concepts within this text. I have created a moving average tradingmethod that simplifies the need to optimize parameter values. Instead of attempting to find optimal parameter values, the Moving Average Confluence methodscans all parameter possibilities and enters trades only when a minimum numberof parameter sets are in agreement.
CHAPTER 8 New Ideas on Entries, Exits, and Filters
203
Trading Strategy Evaluation (Futures)
Net Profit:Drawdown:K-ratio:
Portfolio Statistics7,198,775Sharpe ratio:–1,550,895Correlation to breakout:0.26Correlation to 10-40 MA:
Dec-01
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Equity
Strategy Name: Divergence IndexParameters:10 day and 40 day momentum to calculate Divergence IndexDescription:Enter when Divergence Index falls below –10Run Dates:1/1/1990 – 12/31/2001Avg. Avg.Avg.#Avg.Avg. Bars BarsProfitSharpe%Avg.ofMarket Net Profit K-ratio Ratio Max DD Trades Win Contracts Per Con. WinWin LossLossFXAD–350,390 –0.05 –0.32 –401,680 393124.35–369 34,153 –28,156 4718BP56,663 –0.060.05 –388,463 393617.5883 46,066 –23,531 3713CD–302,010 –0.05 –0.24 –469,970 422948.51–148 55,324 –32,197 4315JY918,7630.270.56 –198,013 384713.381,528 70,372 –24,473 6416SF427,4250.180.31 –211,575 394615.50707 54,926 –26,726 5414RatesED1,077,575 0.080.66 –309,000 364787.49128 57,140 –29,961 5713TY652,9840.240.40 –144,859 394628.10596 60,001 –20,335 5915US572,2810.220.44 –149,156 384719.72764 56,887 –22,584 5412StockSP285,1130.090.24 –298,275 35348.081,008 69,830 –24,037 6513MetalsGC123,1100.040.08 –351,130 372743.4277 79,053 –24,719 5923HG–63,1630.02 –0.05 –364,025 364734.14–26 36,600 –34,461 4315PL–494,655 –0.30 –0.49 –545,255 393145.03–282 16,045 –25,452 4316SL92,4600.060.06 –202,765 354031.3384 43,819 –24,810 4515EnergyCL127,4000.030.09 –176,300 443629.0092 47,092 –22,730 4714HO–154,942 –0.06 –0.12 –338,898 413225.17–158 42,078 –25,370 4214HU–129,671 –0.03 –0.10 –291,988 463722.34–143 35,272 –25,737 4019GrainsC525,8130.100.32 –258,488 353775.06200 78,351 –22,398 5918S84,8250.050.07 –152,013 414631.7950 31,675 –24,390 4215W473,5250.140.30 –165,938 353748.42279 78,255 –24,718 7015MeatsFC317,5400.040.22 –200,335 444139.51183 56,980 –27,235 5118LC369,0840.140.38 –91,308356349.17181 28,917 –24,976 3916LH88,6920.030.06 –221,360 484630.8860 38,629 –29,274 4612PB–127,548 –0.09 –0.09 –479,168 434220.32–146 46,440 –38,539 4916SoftsCC–126,010 –0.10 –0.10 –387,710 423651.47–72 37,591 –26,676 3910CT635,9150.050.47 –308,995 354024.58728 85,051 –26,872 6312JO–149,475 –0.07 –0.15 –219,353 353435.67–87 37,937 –24,529 4115KC1,069,988 0.220.50 –164,644 404311.412,343 91,341 –20,992 6316LB822,6320.100.31 –212,984 433334.11561 117,132 –28,180 5517SB374,8530.080.29 –182,974 374154.66182 55,477 –21,139 5016Average 239,9590.050.14 –262,887 383833.34280 52,948 –25,173 49158,000,0007,000,0006,000,0005,000,0004,000,0003,000,0002,000,0001,000,0000-1,000,000
0.730.630.56
© 2002 Lars Kestner – All Rights Reserved
FIGURE
8.12a
Divergence Index Strategy Applied to Futures.
Net Profit1,643,266438,228316,0371,673,51720,336879,776
Year199019911992199319941995
8.12b
AverageSharpe Ratio0.070.380.24–0.10–0.040.230.140.22
1991
K-ratio1.07–0.020.280.460.110.39
1992
Sharpe Ratio2.100.440.441.960.031.20
1993
Year199619971998199920002001
1994
Year
1995
Net Profit by Year
Net Profit762,460493,611652,202–902,079515,743712,044
AverageWin52,16843,50769,83043,87941,48162,76042,74170,755
Average Avg. Bars Avg. BarsLossWinLoss–27,01649154310–18,220–24,03765134717–27,361–24,61243165716–23,83515–30,006465214–24,731
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Num. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable850.8559.03%1 Month144142900.6463.38%3 Months1391020.7373.38%6 Months110–2.0582.71%12 Months1331271100.8286.61%18 Months1211060.6787.60%24 Months
Avg. ProfitPer Contract3603721,008–37–7017769609
1996
K-ratio0.15–0.100.26–0.600.180.40
Average AverageAverageMax DD Num Trades % Win–333,94039382835–150,754–298,27535343736–365,794–269,06244353740–192,146–248,04343483938–246,110
Performance Breakdown by Year
AverageK-ratio0.060.140.09–0.05–0.020.100.030.05
Divergence Index Strategy Applied to Futures.
FIGURE
–1,500,000
–1,000,000
500,000
0
500,000
1,000,000
1,500,000
1990
AverageNet Profit150,090575,710285,113–85,562–52,404361,388161,942437,984
2,000,000
Breakdown Statistics (Futures)Divergence Index10 day and 40 day momentum to calculate Divergence IndexEnter when Divergence Index falls below –101/1/1990 – 12/31/2001Breakdown by Market Sector
MarketSectorFXRatesStockMetalsEnergyGrainsMeatsSofts
System Name:Parameters:Description:Run Dates:
Net Profit
2