2,7930.03 –0.01 –539,510 154 29 23.65–7 44,735 –18,122 4410PG226,0240.09 0.11 –440,222 158 37 24.8131 29,430 –16,295 3310184 84,739 –17,428 5010Healthcare AMGN 1,520,016 0.11 0.44 –414,043 141 28 58.88BMY827,7720.14 0.39 –427,874 121 36 33.25200 50,738 –18,547 5110JNJ742,5420.15 0.35 –270,865 120 37 38.36154 45,520 –17,020 4713PFE1,730,162 0.19 0.66 –395,705 132 38 42.20313 60,087 –15,404 4311AIG119,1420.08 0.06 –598,254 134 31 34.7628 48,415 –19,946 4911FinancialsFNM–897,868 –0.06 –0.45 –1,142,998 181 24 18.09–274 35,599 –17,592 419MER 1,265,591 0.18 0.51 –292,122 133 32 38.01252 65,632 –16,320 558AAPL306,9540.120.13–270,1021133517.7613942,442–18,5854815Information25 82,175 –16,331 479Technology DELL 1,888,562 0.14 0.41 –476,532 149 30 510.64IBM–181,561 0.03 –0.08 –396,583 147 34 20.66–82 33,730 –19,939 3712INTC 1,189,528 0.21 0.48 –279,454 140 43 87.1697 41,789 –16,608 398MSFT 1,338,833 0.21 0.51 –275,901 112 37 57.73209 61,747 –16,653 5510SUNW 896,7330.08 0.36 –846,298 137 33 184.0434 56,258 –18,213 469TXN2,645,652 0.24 0.86 –208,528 100 42 78.93332 84,957 –16,320 5711VZ–601,494 –0.04 –0.32 –696,524 153 29 20.00–216 24,073 –16,138 3911TelecomSPX308,5040.09 0.14 –525,137 149 31 2355.891 45,725 –17,336 478IndicesNDX741,2800.16 0.30 –346,319 133 32 1486.194 50,723 –15,936 548RUT1,249,671 0.12 0.40 –395,379 103 35 4134.133 71,590 –19,920 6013Average 390,8080.07 0.12 –535,122 142 34 286.0222 44,859 –18,145 441025,000,00020,000,00015,000,00010,000,0005,000,0000–5,000,000
Net Profit:Drawdown:K-ratio:
Portfolio Statistics13,287,461Sharpe ratio:–5,863,550Correlation to breakout:0.18Correlation 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:Parameters:Description:Run Dates:
0.430.720.61
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7. 2 0 a
Results of 80-day Momentum Strategy Applied to Stocks.
7. 2 0 b
19911992
1993
Results of 80-day Momentum Strategy Applied to Stocks.
FIGURE
–4,000,000
–2,000,000
0
2,000,000
4,000,000
6,000,000
8,000,000
1990
Net Profit–1,889,9954,643,077–88,700–625,273–524,9728,422,657
10,000,000
Year199019911992199319941995K-ratio0.060.300.15–0.09–0.38–0.29
1994
Year
1995
1996
Net Profit by Year
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio1,770,0881996–0.14–0.684,296,3080.1919971.691,393,734–0.041998–0.06610,5351999–0.30–0.562000–1,843,270–0.05–0.39–3,119,41820011.314.97
AverageWin27,38027,70031,41034,40542,38860,27149,88257,58524,07356,013
Average Avg. Bars Avg. BarsLossWinLoss–17,072359–25,4623514–18,18738104210–16,521–17,8834410–17,10048119–17,953494711–17,521–16,1383911–17,7315310Profitability Windows
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Num. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable144760.6452.78%1 Month142750.9052.82%3 Months139710.6251.08%6 Months770.1357.89%12 Months13312786–0.8467.72%18 Months12186–1.5871.07%24 Months
AverageAverage Average Avg. ProfitAverageAverageK-ratio Sharpe Ratio Max DD Num Trades % Win Per Contract–718,455182–0.0132–0.27–67–987,540157–0.1536–0.40–215154–0.0534–0.10–154–744,279140370.09920.16–345,745–480,0471430.11330.1350–377,1221290.15350.46213–677,79114920.07290.04128360.151080.38–393,343153–0.0429–0.32–216–696,5241283330.120.28–422,279
Breakdown Statistics (Stocks)
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 – 12/31/2001Breakdown by Market Sector
AverageMarketNet ProfitSectorEnergy–527,647Materials–846,529Industrials–172,544Discretionary 338,787Staples238,702Healthcare1,205,123Financials162,288Info. Tech.1,154,957Telecom–601,494Indices766,485
System Name:Parameters:Description:Run Dates:
Net Profit
159
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
160
FIGURE
7. 21
Volatility Breakout Strategy Applied to Fannie Mae.
Slow %K stochastic rises above 80 and then crosses below 80. There are no otherrules and no rules for exiting positions, except for an entry in the other direction.Sample entries and exits are applied to Home Depot (HD) in the graph below(Figure 7.24). The stochastic oscillator is adept at picking tops and bottoms inmean reverting markets. In early October, prices become overbought, leading to astochastic level greater than 80. Short entries are established as the 14-day Slow%K stochastic falls back below 80. Long entries are established in late October asthe stochastic indicator falls below and then rises above 20.Results of the 14-day slow %K stochastics leave much to be desired (seeFigures 7.25a through 7.26b). Performance on futures is dreadful, as the strategyproduces profits in only two of the 12 years in the test. Stock performance is notquite as bad, with profits coming in 5 out of the 12 years. On the futures side, sectors that perform poorly under standard trend-following rules (metals, meats,cocoa) perform very well using the stochastics strategy.Returns from this stochastics strategy are negatively correlated to returns fromchannel breakout and moving average crossover. This should not be surprising. Inthe stochastics strategy, we buy as prices fall and sell as prices rise—exactly opposite to the other two trend-following strategies.
CHAPTER 7 Dissecting Strategies Currently Available
161
Trading Strategy Evaluation (Futures)
Net Profit:Drawdown:K-ratio:
FIGURE
Portfolio Statistics341,640Sharpe ratio:–5,802,061Correlation to breakout:–0.09Correlation to 10-40 MA:
7. 2 2 a
Results of Volatility Breakout Strategy Applied to Futures.
0.020.510.43
© 2002 Lars Kestner – All Rights Reserved
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: Volatility breakoutParameters:1 day returns, 2 sigmas of past 100 day price returnsDescription:Enter long if today’s price return is greater than twice the 100 day sigma; opposite for shortsRun Dates:1/1/1990 – 12/31/2001#Avg.Avg. Avg.Sharpe%Avg.Avg.Avg.ofProfitBars BarsMarket Net Profit K-ratio Ratio Max DD Trades Win Contracts Per Con. WinLossWin LossFXAD–374,390 –0.06 –0.21 –996,30085 2926.14–17362,710 –32,553 5227BP–312,888 –0.05 –0.14 –865,825 100 3917.94–17049,506 –36,652 4023CD428,410 0.03 0.19 –752,59072 4947.6612663,784 –48,609 4935JY468,563 0.02 0.24 –412,68886 4413.8026454,336 –36,477 4228SF–631,538 –0.12 –0.33 –943,82592 3616.15–41755,508 –41,552 4924RatesED 1,832,900 0.19 0.88 –398,87574 4984.1230194,512 –40,198 6122TY–482,313 –0.06 –0.24 –717,18890 4030.56–17655,945 –46,250 4426US–172,125 0.04 –0.08 –519,28180 4021.46–16757,770 –44,501 4432StockSP–172,025 –0.12 –0.08 –619,95097 338.29–34458,113 –32,858 4125MetalsGC572,370 0.13 0.27 –490,41068 4049.1617081,809 –40,000 6627HG–321,000 –0.19 –0.17 –834,60077 3833.67–14847,465 –36,691 4435PL338,455 0.12 0.19 –312,43568 4748.9311853,973 –37,046 5632SL428,675 0.08 0.25 –326,22075 4735.4215751,235 –34,380 6019EnergyCL–221,580 0.02 –0.10 –624,28090 3628.12–8364,288 –39,108 4030HO74,907 –0.01 0.04 –430,56378 4024.164971,158 –44,979 4336HU–258,972 –0.10 –0.12 –958,48286 4422.41–12851,450 –45,874 3833GrainsC378,138 0.01 0.17 –484,100 104 4582.074958,423 –40,895 4713S–796,213 –0.17 –0.38 –1,478,475 99 3530.28–31543,760 –38,691 4122W946,350 0.13 0.48 –507,75065 4550.3029384,234 –41,217 6928MeatsFC–101,330 –0.06 –0.06 –476,23081 4741.32–6139,733 –39,840 5124LC–885,980 –0.18 –0.46 –1,092,340 83 3350.10–22455,677 –43,445 4133LH–685,152 –0.04 –0.33 –987,07689 3532.87–22054,893 –40,411 4826PB–403,588 –0.09 –0.19 –881,18841 3425.38–32975,357 –51,742 8342SoftsCC180,870 –0.03 0.10 –613,24070 4351.152051,699 –36,993 5329CT19,270 –0.09 0.01 –756,81590 3224.341772,654 –33,935 6617JO–463,995 –0.15 –0.23 –1,286,288 89 3136.99–14558,975 –34,916 5623KC777,825 0.18 0.40 –299,86987 4514.1862963,351 –35,317 5021LB–45,176 –0.09 –0.02 -734,25648 5051.69–7073,016 –80,302 4675SB223,171 –0.01 0.12 –625,82377 3856.603665,634 –36,376 6322Average 11,388 –0.02 0.01 –680,89978 3935.18–3159,032 –39,727 49283,000,0002,000,0001,000,0000–1,000,000–2,000,000–3,000,000–4,000,000
162
Breakdown Statistics (Futures)
7. 2 2 b
199119921993
Results of Volatility Breakout Strategy Applied to Futures.
FIGURE
–1,500,000
–1,000,000
–500,000
0
500,000
1,000,000
1,500,000
1990
Net Profit1,745,638215,864–983,659–385,093–831,783–342,973
2,000,000
Year199019911992199319941995
1994
K-ratio–0.200.04–0.110.120.410.45
1995
Year
1996
Average Avg. Bars Avg. BarsLossWinLoss4628–39,168–32,7373720–32,858412528–37,029574033–43,320–40,2685221–43,8605631–42,9735631
1997
1998
2000
2001
© 2002 Lars Kestner – All Right Reserved
1999
Num. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable14475–1.0652.08%1 Month142690.1248.59%3 Months68–0.5848.92%6 Months139133620.3846.62%12 Months491.4038.58%18 Months127121310.7425.62%24 Months
Net Profit by Year
Performance Breakdown by YearNet ProfitK-ratio Sharpe RatioYear–1,260,2190.4019961.52103,774–0.0719970.25–611,7641998–0.31–1.28352,8271999–0.07–0.401,221,0882000–0.37–0.9220011,039,355–0.16–0.29
System Name:Volatility breakoutParameters:1 day returns, 2 sigmas of past 100 day price returnsDescription:Enter long if today’s price return is greater than twice the 100 day sigma; opposite for shortsBreakdown by MarketRun Dates:1/1/1990 – 12/31/2001AverageAvg. ProfitAverage AverageAverageAverageAverageAverageMarketPer ContractWinK-ratio Sharpe Ratio Max DD Num Trades % WinNet ProfitSector–84,369FX–0.0439–0.05–74–794,24657,16987Rates–408,836294,616610.04320.14–1152,057Stock–619,950–172,02558,11397–0.1233–0.08–344Metals–490,916254,62574720.0358,621430.13Energy–135,21585–0.0340–0.06–54–671,10862,299Grains176,092899–0.014262,1390.09–823,442Meats–859,209–519,01374–0.0937–0.26–20856,415Softs115,3287781–0.034064,2220.06–719,382
Net Profit
CHAPTER 7 Dissecting Strategies Currently Available
163
Trading Strategy Evaluation (Stocks)
Net Profit:Drawdown:K-ratio:
Portfolio Statistics4,097,361Sharpe ratio:–3,198,651Correlation to breakout:0.07Correlation 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: Volatility breakoutParameters:1 day returns, 2 sigmas of past 100 day price returnsDescription:Enter long if today’s price return is greater than twice the 100 day sigma; opposite for shortsRun Dates:1/1/1990 – 12/31/2001#Avg.Avg. Avg.ofProfitBars BarsSharpe%Avg.Avg.Avg.Win LossMarket Net Profit K-ratio RatioMax DD Trades Win hrs (000) Per Con. WinLossEnergySLB54,8510.080.03 –269,45072 4316.144 43,659 –32,883 5630XOM–83,287 –0.05 –0.05 –469,18180 3446.98–23 48,323 –26,240 7120MaterialsAA–541,286 –0.11 –0.26 –746,674 154 3453.29–68 22,960 –17,163 3512DD–560,395 –0.11 –0.30 –826,47577 3921.08 –397 42,188 –40,652 5229IP510,7460.100.29 –322,29769 4217.24377 60,071 –32,343 6130IndustrialsBA–267,754 –0.15 –0.15 –997,48177 3922.50 –231 45,893 –37,795 4531GE–59,2430.04 –0.03 –533,52396 3570.13–16 61,295 –35,354 4921MMM –501,492 –0.08 –0.25 –1,176,582 88 3814.07 –515 45,632 –38,971 4924ConsumerDIS417,5380.120.22 –561,88070 4734.75179 56,917 –39,001 572882,767 –0.010.05 –327,11990 3913.4630 51,349 –32,026 4525Discretionary GMHD383,447 –0.010.18 –605,37581 4867.8946 56,763 –46,636 4727WMT –410,707 –0.04 –0.23 –839,676 104 3740.22 –123 53,231 –38,430 4221ConsumerG–273,257 –0.01 –0.14 –450,52584 3740.69–80 62,102 –41,516 6022KO467,3730.080.27 –330,28377 4725.26241 56,399 –38,103 5128StaplesMO–615,498 –0.260.35 –876,15589 4025.48 –264 41,102 –39,233 4427PG560,7960.150.31 –340,48275 4821.50294 46,391 –30,674 5921Healthcare AMGN 633,6020.100.35 –541,72499 3775.3986 66,579 –29,323 3925BMY –523,379 –0.03 –0.29 –1,028,792 86 3631.26 –192 47,877 –36,378 532