5JNJ–25,954 –0.02 –0.01 –744,73876 3940.04–5 57,821 –38,028 6225PFE998,1740.340.58 –249,52580 4492.28132 66,364 –29,915 6019FinancialsAIG82,235 –0.030.04 –510,24982 3936.8123 61,142 –37,742 5623FNM –187,520 –0.02 –0.11 –805,58181 3822.43–92 53,070 –36,234 5027MER –341,500 –0.11 –0.15 –781,21285 3449.56–90 60,613 –38,128 4826Information AAPL 946,0470.290.48 –316,34374 5316.77755 59,242 –39,242 55250.170.42 –450,178 100 41 566.9714 69,890 –34,951 3823Technology DELL 904,757IBM 1,815,791 0.340.81 –341,73674 4622.35 1,017 86,454 –31,449 5924INTC 1,221,140 0.240.53 –475,84470 4798.06162 87,613 –48,078 6522MSFT 350,8590.000.15 –1,005,595 108 3678.3138 70,159 –34,946 4219SUNW –839,810 –0.07 –0.43 –1,201,906 104 34 211.17–38 49,710 –37,179 4222TXN–60,877 –0.04 –0.03 –538,58889 4070.52–5 56,283 –38,850 5022TelecomVZ–901,326 -0.19 –0.47 –949,01880 3923.11 –446 38,266 –41,034 4929IndicesSPX –499,732 –0.06 –0.25 –768,17289 30 2305.76–3 67,190 –38,946 4428NDX78,439 –0.030.03 –729,98491 45 1502.821 54,355 –42,345 36313 77,293 –53,012 4630RUT 1,281,815 0.070.50 –848,52977 52 4870.42Average 120,5110.020.05 –645,90886 41 313.0824 56,594 –36,847 50257,000,0006,000,0005,000,0004,000,0003,000,0002,000,0001,000,0000–1,000,000
0.240.510.45
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7. 2 3 a
Results of Volatility Breakout Strategy Applied to Stocks.
164
Breakdown Statistics (Stock)
7. 2 3 b
199119921993
1994
K-ratio–0.090.230.400.79–0.33–0.07
1995
Year
1996
Net Profit by Year
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio–1,328,4960.3419960.8919971,063,1120.401.921,477,1341998–0.18–0.8519991,888,414–0.30–0.44–2,147,7730.2020000.322001–319,913–0.120.00
Results of Volatility Breakout Strategy Applied to Stocks.
FIGURE
–3,000,000
–2,000,000
–1,000,000
0
1,000,000
2,000,000
1990
Net Profit1,644,5852,647,021–824,894–421,725464,799–4,753
3,000,000
Year199019911992199319941995
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Average Avg. Bars Avg. BarsLossWinLoss6425–29,562–30,05249244725–37,373–39,0234825–37,3825324–33,4115424–37,36851255022–37,814–41,0344929–44,7684230Profitability WindowsNum. ofNumber of Profitable PercentLengthWindows Windows ProfitableSharpe Ratio7614452.78%–0.681 Month7351.41%1420.703 Months7453.24%0.846 Months1396649.62%1331.2112 Months7155.91%127–1.4418 Months6957.02%121–0.4724 Months
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 shortsRun Dates:1/1/1990 – 12/31/2001Breakdown by Market SectorAverageAverageAverage Average Avg. ProfitAverageAverageAverageMarketWinK-ratioSharpe Ratio Max DD Num Trades % Win Per ContractNet ProfitSectorEnergy–14,21876380.02–9–0.0145,991–369,316Materials–631,815–196,978100–0.0438–0.09–2941,740Industrials–276,1638737–0.06–254–0.1450,940–902,529Discretionary 118,261–583,513860.02430.053354,565Staples–499,36134,85481–0.01430.024751,499Healthcare5–641,195270,61159,660850.10390.16Financials–699,014–148,92883–0.0637–0.07–5358,275Info. Tech.619,70188420.132780.2768,479–618,599Telecom–949,018–901,32680–0.1939–0.47–44638,266Indices0–782,228286,84166,27986–0.01420.09
Net Profit
CHAPTER 7 Dissecting Strategies Currently Available
FIGURE
165
7. 2 4
Stochastic Strategy Applied to Home Depot.
One point of interest: Although returns on both futures and stocks were lessthan perfect, both the profitable years on futures and two of the five profitableyears on stocks have occurred over the past three years. This could be a sign thatthe markets are trending less and that the strategies of the future may involveexhaustion methods such as stochastics or RSI to generate trading signals.Relative Strength IndexThe next oscillator tested is a 14-day Relative Strength Index (RSI). Long entriesare established if today’s 14-day RSI falls below 35. Short entries are establishedif today’s 14-day RSI rises above 65. There are no other rules and no rules for exiting positions, except for an entry in the other direction.The RSI generates signals common with similar oscillators such as stochastics. Sample entries for Microsoft (MSFT) are detailed in Figure 7.28. In earlyOctober, prices rally from a bottom, causing the 14-day RSI to fall below 35 andgenerating a long entry. In later October, after a three week rally, a quick sell-offcauses the RSI to fall below 65. Our long position is exited and a short position isestablished.
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
166
Trading Strategy Evaluation (Futures)Strategy Name: 14 day Slow %K stochasticsParameters:14 days in stochastic calculationDescription:Enter long when %K crosses above 20, enter short when %K crosses below 80Run 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 LossFXAD898,9800.14 0.44 –490,760 109 6725.6331735,215 –46,796 1749BP210,6380.11 0.11 –423,888 100 6117.7613232,381 –44,619 1848CD–107,910 –0.07 –0.05 –996,850 101 6745.85–2528,297 –61,872 2149JY–1,068,175 –0.22 –0.51 –1,291,713 88 5913.83–792 30,636 –71,023 1955SF–518,475 –0.05 –0.26 –850,23888 6015.38–401 30,045 –61,018 1957RatesED –3,391,050 –0.20 –1.16 –3,740,525 69 5886.37–567 28,959 –156,376 2175TY–582,953 –0.16 –0.26 –871,29796 6129.27–194 31,501 –64,975 1853US–158,719 –0.06 –0.08 –702,656 106 6320.29–5532,007 –58,010 1648StockSP297,7250.03 0.15 –565,01391 658.2836533,412 –52,995 1959MetalsGC–377,760 –0.08 –0.17 –739,52089 6045.54–9333,594 –59,951 1856HG159,2000.02 0.08 –617,23897 6632.606031,795 –55,912 1758PL249,9250.06 0.14 –787,97596 6445.316630,466 –44,898 2247SL14,3750.05 0.01 –394,76585 6232.902830,168 –47,531 2257EnergyCL–1,145,260 –0.22 –0.47 –1,219,770 97 5929.89–364 29,408 –68,275 1749HO–763,585 –0.21 –0.29 –1,011,104 94 6122.94–362 29,920 –67,189 1853HU–644,423 –0.10 –0.25 –921,27894 6223.06–303 29,234 –65,337 1952GrainsC–734,463 –0.15 –0.33 –975,07586 6374.62–109 31,872 –75,720 1961S–29,5630.03 –0.01 –547,51396 6430.29–230,539 –53,366 2051W–420,538 –0.11 –0.17 –1,106,063 92 6350.97–9035,108 –72,240 1956MeatsFC464,7400.00 0.22 –636,485 111 6541.2910233,305 –49,506 1746LC1,863,092 0.42 0.88 –338,628 136 7950.2027230,473 –48,291 1549LH65,868 –0.02 0.03 –584,808 102 6531.332334,664 –61,475 1950PB953,9600.20 0.43 –400,512 112 6720.9542837,991 –49,877 1745SoftsCC1,288,880 0.20 0.63 –577,440 111 7349.0223133,209 –47,713 1752CT–324,655 0.03 –0.16 –536,31090 6924.74–150 30,632 –79,763 2063JO1,203,015 0.29 0.49 –443,640 113 7435.6230131,563 –49,589 1947KC–937,271 –0.13 –0.34 –1,430,715 97 6412.07–800 27,365 –75,243 1852LB–287,344 –0.01 –0.09 –1,242,616 119 6732.71–7734,847 –79,206 1644SB68,5110.00 0.03 –517,91097 6451.93831,256 –54,217 1854Average –125,108 –0.01 –0.03 –832,07795 6233.35–6830,662 –60,766 18510-1,000,000Equity
-2,000,000-3,000,000-4,000,000
Net Profit:Drawdown:K-ratio:
FIGURE
7. 2 5 a
Stochastic Strategy Applied to Futures.
Portfolio Statistics–3,753,234Sharpe ratio:–4,817,779Correlation to breakout:–0.15Correlation to 10-40 MA:
–0.23–0.84–0.79
Dec-01
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-90
-6,000,000
Jan-91
-5,000,000
© 2002 Lars Kestner – All Rights Reserved
167
AverageNet Profit–116,989–1,033,180297,72511,435–851,089–394,854836,915168,523
7. 2 5 b
19901991
K-ratio–0.25–0.140.180.12–0.37–0.18
1992
Sharpe Ratio–0.46–0.680.680.18–0.65–1.01
1993
Year199619971998199920002001
1994
1995
Year
1996
K-ratio–0.170.02–0.070.22–0.23–0.25
Net Profit by Year
Net Profit–315,211–771,352361,326991,753–1,201,215–270,136
AverageWin31,31523,11733,41231,50629,52132,50734,10831,479
Average Avg. Bars Avg. BarsLossWinLoss–57,06619521444–69,840–52,9951959–52,07320541851–66,934–67,1081956–52,2871747–64,2891852
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Num. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable73–0.1950.69%1 Month14414257–0.5240.14%3 Months540.2338.85%6 Months139460.8234.59%12 Months1334737.01%–0.8218 Months12736–0.1829.75%24 Months121
AverageAverage Average Avg. ProfitAverageSharpe Ratio Max DD Num Trades % Win Per Contract–810,6909763–0.05–1546846–204–0.37–1,328,620–565,01391650.1536515–634,87492630.029560–343–0.33–1,050,717–876,2179163–0.17–67–490,108115690.39206105690.09–81–791,439
Performance Breakdown by Year
AverageK-ratio–0.02–0.100.030.01–0.18–0.070.150.06
Stochastic Strategy Applied to Futures.
FIGURE
–1,500,000
–1,000,000
–500,000
0
500,000
1,000,000
Breakdown Statistics (Futures)14 day Slow %K stochastics14 days in stochastic calculationEnter long when %K crosses above 20, enter short when %K crosses below 801/1/1990 – 12/31/2001Breakdown by Market Sector
Net Profit–694,621–1,030,055683,328224,322–638,956–971,455
1,500,000
Year199019911992199319941995
MarketSectorFXRatesStockMetalsEnergyGrainsMeatsSofts
System Name:Parameters:Description:Run Dates:
Net Profit
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
168
Trading Strategy Evaluation (Stocks)
Net Profit:Drawdown:K-ratio:
Portfolio Statistics40,583Sharpe ratio:–8,192,040Correlation to breakout:–0.03Correlation 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: 14 day Slow %K stochasticsParameters:14 days in stochastic calculationDescription:Enter long when %K crosses above 20, enter short when %K crosses below 80Run Dates:1/1/1990 – 12/31/2001#Avg.Avg. Avg.Sharpe%Avg.Avg.Avg. Bars BarsofProfitMarket Net Profit K-ratio Ratio Max DD Trades Win hrs (000) Per Con. WinLoss Win LossEnergySLB1,054,815 0.13 0.57 –429,612 1236815.66577 31,162 –38,613 1544XOM570,3190.13 0.33 –396,000997340.79139 26,321 –49,426 2157MaterialsAA1,054,534 0.21 0.51 –407,396527153.98369 50,087 –54,404 4199DD517,5730.09 0.29 –522,904 1106920.73222 27,762 –47,182 1946IP1,197,185 0.26 0.65 –349,334 1117216.60643 30,998 –41,769 2046IndustrialsBA188,4880.08 0.11 –338,916946020.44108 31,993 –41,675 2049GE226,1480.06 0.12 –356,487986577.9328 34,757 –59,074 1952MMM705,1340.08 0.38 –482,366986614.08579 32,915 –40,614 2050ConsumerDIS–241,732 –0.01 –0.12 –546,550986235.27–70 29,746 –55,562 2049290,9400.17 0.16 –240,771986413.54213 32,045 –49,592 2149Discretionary GMHD13,2390.05 0.01 –669,100886461.3915 41,170 –69,494 1960WMT –158,387 –0.06 –0.08 –608,085925940.75–42 33,549 –51,834 1952ConsumerG235,8470.00 0.12 –725,839 1006935.7088 30,077 –56,763 1857KO337,5370.02 0.16 –671,384 1156726.31103 30,386 –53,332 1646StaplesMO–653,108 –0.10 –0.31 –826,848866224.91 –296 29,619 –66,761 2059PG549,3750.09 0.27 –454,234 1147320.96250 30,574 –62,590 1752Healthcare AMGN –546,373 –0.02 –0.22 –1,210,098 966448.58 –119 33,587 –74,353 1855BMY131,075 –0.05 0.07 –590,820896635.4757 31,462 –55,840 1963JNJ31,384 –0.01 0.02 –713,694 1066239.506 30,782 –50,204 1648PFE74,622 –0.02 0.04 –753,674 1056785.629 30,866 –59,303 1751FinancialsAIG84,2830.02 0.05 –549,144 1006341.2521 30,703 –49,960 1752FNM795,6280.06 0.41 –469,661 1087124.71296 30,854 –51,145 1852MER–52,3010.01 –0.03 –544,209 1086250.590 32,878 –53,778 1547Information AAPL –311,022 –0.03 –0.16 –703,493996217.78 –187 30,592 –57,771 175165527.50–4 36,085 –72,601 1952Technology DELL –201,635 –0.04 –0.07 –936,353 100IBM–279,152 –0.10 –0.13 –740,997 1026120.73–78 32,998 –55,259 1846INTC –1,187,364 –