0.21 –0.49 –1,609,738 10161116.64 –100 32,307 –81,635 1849MSFT –816,197 –0.18 –0.35 –984,331886070.48 –133 32,858 –73,410 2056SUNW –661,447 –0.14 –0.28 –1,129,208 8561222.88–35 35,650 –76,263 1962TXN102,388 –0.01 0.05 –763,102 1016487.4614 34,160 –58,346 1852TelecomVZ606,5230.17 0.37 –279,857 1016422.89290 29,901 –35,343 1849IndicesSPX–271,065 –0.09 –0.13 –1,083,386 9064 2222.01–1 33,296 –69,109 1861NDX –1,057,188 –0.24 –0.50 –1,389,437 8962 1817.52–7 31,855 –82,593 1860–4 36,232 –86,348 1347RUT –2,289,483 –0.28 –0.80 –2,596,205 10253 5222.14Average1,1940.00 0.03 –737,4489865329.2087 32,654 –58,292 19544,000,0003,000,0002,000,0001,000,0000–1,000,000–2,000,000–3,000,000–4,000,000–5,000,000–6,000,000
0.01–0.86–0.82
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7. 2 6 a
Stochastic Strategy Applied to Stocks.
169
Breakdown Statistics (Stocks)
7. 2 6 b
1991
Stochastic Strategy Applied to Stocks.
FIGURE
–4,000,000
–3,000,000
–2,000,000
–1,000,000
0
1,000,000
2,000,000
1990
Net Profit–218,783–1,943,5961,424,5851,913,0592,022,781–3,660,423
3,000,000
Year199019911992199319941995
19921993
1994
K-ratio–0.02–0.28–0.170.390.500.00
1995
Year
AverageWin28,74136,28233,22234,12730,16431,67431,47833,52129,90133,794
1996
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
PercentProfitable54.86%54.93%56.83%56.39%52.76%49.59%
Average Avg. Bars Avg. BarsLossWinLoss–44,0191851–47,78527642051–47,121–56,6202053–59,8621853–59,9251854–51,6281750–67,8981852–35,34318491756–79,350Profitability Windows
Num. ofNumber of ProfitableSharpe RatioLength Windows Windows144790.211 Month78–0.793 Months14279–0.686 Months139750.3012 Months133127671.2318 Months600.4124 Months121
Net Profit by Year
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio332,322–0.081996–0.09–2,297,71719970.00–0.68–1,270,17319980.531.101,076,26419990.551.772,268,66220000.651.64585,5392001–0.93–2.52
System Name:14 day Slow %K stochasticsParameters:14 days in stochastic calculationDescription:Enter long when %K crosses above 20, enter short when %K crosses below 80Breakdown by Market SectorRun Dates:1/1/1990 – 12/31/2001AverageAverage Average Avg. ProfitAverageAverageAverageMarketK-ratioSharpe Ratio Max DD Num Trades % Win Per ContractNet ProfitSectorEnergy–412,806812,5671110.13710.45358Materials–426,545923,097910.19710.48411Industrials373,25797640.072390.20–392,590Discretionary –23,985–516,127940.0462–0.0129Staples–669,576117,4131040.00680.0637Healthcare–817,072–77,32399–0.0265–0.02–12Financials–521,005275,8701050.03650.14106Info. Tech.–981,032–479,20497–0.1062–0.21–75Telecom–279,857606,5231010.17640.37290Indices–1,205,9129460–0.20–4–0.48–1,689,676
Net Profit
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
170
FIGURE
7. 2 7
RSI Strategy Applied to Microsoft.
The 14-day RSI strategy performs very poorly on both futures markets andstocks (Figures 7.28a through 7.29b). Both sets of markets produce strong negative Sharpe ratios and K-ratios. Tests on futures markets produce profits in only 4of 12 years. While stocks produce profits in 7 of the 12 years tested, the five yearsof losses overwhelm the seven years of gains. As was seen in the stochastics tests,returns from the 14-day RSI strategy are negatively correlated to basic trend-following returns. Weakest performance is generated by interest rates, petroleumfutures, and technology stocks.Moving Average Convergence/DivergenceOur final strategy tested in this chapter is the popular Moving AverageConvergence/Divergence strategy. The MACD is constructed by calculatingthe difference between a 12-day and 26-day exponential moving average. Thesignal line is generated by calculating a nine-day exponential moving average of the MACD. Long entries are established when the MACD rises abovethe signal line. Short entries are established when the MACD falls below thesignal line.
CHAPTER 7 Dissecting Strategies Currently Available
171
Trading Strategy Evaluation (Futures)
Net Profit:Drawdown:K-ratio:
Portfolio Statistics–9,574,109Sharpe ratio:–11,206,636Correlation to breakout:–0.17Correlation 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 RSIParameters:14 days in RSI calculationDescription:Enter long when %K falls below 35, enter short when %K rises above 65Run 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 Contracts Per Con. WinLossWin LossFXAD123,340 –0.03 0.07 –514,700 426924.6599 44,549 –91,481 46 127BP37,3750.02 0.02 –870,775 427617.7250 41,875 –130,288 53 132CD782,4900.10 0.33 –373,980 516748.58308 54,981 –65,079 4392JY–1,777,938 –0.53 –0.85 –1,780,538 303714.06–3,937 47,739 –115,066 32 138SF–851,700 –0.14 –0.45 –1,071,288 365315.78–1,392 45,363 –97,218 36 131RatesED –1,954,150 –0.15 –0.79 –2,150,825 416387.19–210 44,528 –127,298 37 112TY–1,112,906 –0.28 –0.52 –1,216,969 345928.94–1,112 40,666 –136,261 43 151US –1,033,281 –0.18 –0.50 –1,177,938 344720.31–1,475 45,234 –96,811 37 133StockSP594,2630.06 0.30 –642,013 40708.241,800 58,092 –86,094 42 151MetalsGC467,2800.15 0.20 –521,380 426942.00255 47,802 –72,094 52 114HG–403,213 –0.10 –0.22 –951,700 386334.97–339 43,403 –106,580 47 131PL572,6400.13 0.29 –642,530 417348.69302 50,171 –81,999 54 126SL852,7200.26 0.42 –396,970 437233.52616 46,163 –45,233 51 119EnergyCL–1,415,590 –0.28 –0.55 –1,598,220 375129.08–1,259 45,643 –123,423 43 118HO–395,560 –0.09 –0.14 –1,115,990 416125.98–308 60,185 –114,564 44 114HU–49,640 –0.04 –0.02 –563,732 435821.84–12 54,341 –76,092 41 107GrainsC–829,975 –0.13 –0.34 –1,117,675 366475.68–285 45,504 –140,225 52 135S325,913 –0.01 0.14 –633,738 406529.66313 51,286 –68,693 47 123W–521,313 –0.11 –0.22 –1,070,925 375950.53–300 52,377 –114,268 46 131MeatsFC–177,885 –0.05 –0.08 –987,890 356940.64–119 47,614 –119,313 45 167LC–424,944 –0.04 –0.21 –568,600 315848.13–180 50,319 –90,344 45 163LH152,9040.04 0.08 –452,392 436330.91111 49,195 –73,783 41 116PB177,9920.06 0.09 –399,556 377320.53255 43,918 –99,207 55 151SoftsCC357,2600.09 0.17 –441,400 386349.54248 53,860 –58,956 41 140CT –1,243,350 –0.23 –0.67 –1,349,980 285424.62–1,825 45,831 –149,676 55 162JO342,4580.07 0.14 –676,140 426436.70224 53,708 –73,614 41 123KC –1,227,281 –0.15 –0.41 –2,120,419 356012.22–2,574 41,313 –140,605 49 118LB–606,544 –0.08 –0.20 –1,416,288 446835.73–395 52,937 –157,754 36 138SB–335,474 –0.12 –0.16 –801,002 385553.90–180 47,763 –80,645 49 116Average –319,137 –0.06 –0.14 –920,852 376033.68–377 46,879 –97,756 43 1262,000,0000-2,000,000-4,000,000-6,000,000-8,000,000-10,000,000-12,000,000
–0.57–0.84–0.80
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7. 2 8 a
RSI Strategy Applied to Futures.
172
7. 2 8 b
1991199219931994
1995
Year
1996
Net Profitability by Year
K-ratio–0.180.36–0.100.34–0.200.05
AverageWin46,90132,60758,09246,88553,39049,72347,76149,235
Average Avg. Bars Avg. BarsLossWinLoss42124–99,826–90,093299942151–86,094–76,4775112243113–104,693–107,7294813047149–95,662–110,20845133
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Num. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable14469–0.6047.92%1 Month142530.4237.32%3 Months52–0.1837.41%6 Months139133330.4724.81%12 Months12721–1.0016.54%18 Months260.1821.49%24 Months121
Average Average Avg. ProfitAverageAverageSharpe Ratio Max DD Num Trades % Win Per Contract4060–974–0.17–922,256–1,136,4332742–0.45–69940701,8000.30–642,013–628,14541690.172084057–526–0.24–1,092,648–940,7793863–0.14–913766–17–0.03–602,110–1,134,2053861–0.19–750
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio–1,255,660–0.531996–1.11454,0891997–0.15–0.64–255,0031998–0.37–0.871,047,970–0.121999–0.97–967,7162000–0.73–1.97252,4522001–0.15–0.81
RSI Strategy Applied to Futures.
FIGURE
–3,000,000
–2,500,000
–2,000,000
–1,500,000
–1,000,000
–500,000
0
500,0001990
Net Profit–1,969,512–897,463–767,682–1,445,818–2,789,276–933,726
1,000,000
Breakdown Statistics (Futures)14 day RSI14 days in RSI calculationEnter long when %K falls below 35, enter short when %K rises above 65Breakdown by Market Sector1/1/1990 – 12/31/2001
Average AverageK-ratioNet Profit–337,287–0.11–1,025,084 –0.15594,2630.06372,3570.11–620,263–0.14–341,792–0.09–67,9830.00–452,155–0.07
1,500,000
Year199019911992199319941995
MarketSectorFXRatesStockMetalsEnergyGrainsMeatsSofts
System Name:Parameters:Description:Run Dates:
Net Profit
CHAPTER 7 Dissecting Strategies Currently Available
173
Trading Strategy Evaluation (Stocks)
Avg.BarsLoss1612434111612014614413711612016912614116313714615614716714313916714710315710413916012515812316014492140
Net Profit:Drawdown:K-ratio:
Portfolio Statistics–7,032,755Sharpe ratio:–13,381,024Correlation to breakout:–0.13Correlation 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 RSIParameters:14 days in RSI calculationDescription:Enter long when %K falls below 35, enter short when %K rises above 65Run Dates:1/1/1990 – 12/31/2001#Avg.Avg.Sharpe%Avg.Avg.Avg. BarsofProfitMarket Net Profit K-ratio RatioMax DD Trades Win hrs (000) Per Con. WinLoss Win–553 46,952 –83,652 37EnergySLB–338,453 –0.07 –0.17 –669,830 325618.42477 55,814 –158,628 71XOM576,2380.04 0.30 –723,344 298339.50151 30,288 –41,170 17MaterialsAA940,1400.05 0.46 –612,178 121 6951.891,076 51,186 –78,152 53DD940,7880.11 0.46 –337,832 447720.241,817 51,855 –51,211 57IP1,455,155 0.38 0.69 –244,463 448218.22–96 45,156 –118,099 51IndustrialsBA–81,798 –0.01 –0.04 –710,955 387121.92–238 59,853 –97,452 57GE–551,274 –0.09 –0.30 –679,624 305078.902,145 50,744 –69,209 53MMM 1,256,945 0.23 0.72 –255,750 448213.4993ConsumerDIS172,3030.02 0.08 –578,416 446139.3149,850 –69,682 36–615 44,459 –63,793 44–304,259 –0.14 –0.16 –711,318 375113.34Discretionary GM–528 41,461 –185,386 57HD–983,966 –0.07 –0.43 –1,316,118 326955.70388 54,871 –85,774 40WMT643,4340.14 0.31 –498,086 467239.00244 51,192 –79,512 42ConsumerG300,2260.01 0.16 –477,593 406835.78403 52,233 –156,723 44KO438,6450.03 0.19 –833,272 448023.56Staples–807 43,501 –115,686 49MO–651,657 –0.17 –0.31 –939,039 366122.81–45 49,854 –99,195 44PG–58,300 –0.04 –0.03 –907,456 386625.03–628 60,944 –240,130 56HealthcareAMGN –1,232,585 –0.07 –0.40 –1,863,956 346858.09176 51,677 –106,913 49BMY205,247 –0.01 0.09 –801,860 387132.7963JNJ140,2690.01 0.06 –1,157,350 397241.1356,835 –135,465 42–212 53,348 –120,330 49PFE–628,071 –0.15 –0.25 –1,205,406 345985.86–285 48,553 –101,642 40FinancialsAIG–424,471 –0.09 –0.19 –782,154 375943.26497 62,351 –126,929 57FNM411,9060.04 0.22 –707,419 347424.66–261 58,048 –137,047 40MER –583,673 –0.11 –0.23 –1,308,586 376260.50–102 48,804 –79,674 48InformationAAPL –94,6550.01 –0.04 –805,320 436019.5564 719.82 –101 48,595 –284,390 51Technology DELL –2,425,660 –0.20 –0.49 –3,287,845 3373IBM–36,081 –0.02 –0.02 –750,866 426418.1248,849 –84,250 51INTC –1,099,569 –0.19 –0.43 –1,334,885 3661 126.27 –233 43,441 –144,024 46–171 56,176 –165,046 37MSFT –431,214 –0.07 0.16 –1,234,359 407059.59–45 56,813 –142,506 44SUNW –408,737 –0.01 –0.15 –857,301 4267 215.23TXN –1,511,004 –0.17 –0.47 –2,437,99