5 101 2816.84 –727 40,458 –32,462 5420IndustrialsBA56,652 –0.06 0.03 –503,573 89 3721.0717 52,984 –30,666 5621GE–85,068 –0.06 –0.05 –674,921 97 3680.03–10 56,299 –33,086 5617MMM –328,838 –0.03 –0.19 –687,914 103 3413.22 –282 36,150 –24,244 4719ConsumerDIS–162,899 –0.06 –0.08 –573,375 104 3135.00–52 63,734 –30,947 5218502,8950.05 0.27 –360,650 90 4113.44387 56,528 –30,621 5518Discretionary GMHD844,8830.04 0.37 –505,348 88 3953.76157 70,356 –30,537 6018WMT18,203 –0.03 0.01 –666,593 93 3938.67–9 47,965 –30,876 5219ConsumerG43,9890.03 0.02 –500,314 95 3536.493 53,330 –28,201 5917KO–151,106 –0.05 –0.07 –670,359 96 3226.47–58 59,928 –30,857 5719StaplesMO1,152,980 0.29 0.60 –183,387 77 4523.81610 67,631 –29,745 6218PG14,1640.04 0.01 –441,002 95 3219.82–8 58,549 –27,266 5919Healthcare AMGN 1,153,918 0.11 0.47 –326,436 79 4248.76298 80,335 –32,717 6022BMY14,1560.05 0.01 –548,689 92 3631.23–6 49,563 –27,990 5818JNJ548,2170.06 0.31 –450,045 86 3837.38185 63,989 –28,596 6119PFE–142,199 –0.03 –0.07 –672,086 95 3772.84–21 56,356 –35,284 5518FinancialsAIG328,6480.09 0.18 –310,033 85 4142.1991 55,218 –32,157 5918FNM–235,686 –0.01 –0.12 –571,975 111 2424.87–83 64,596 –23,503 6215MER386,9240.12 0.20 –363,040 92 3552.5872 65,436 –29,113 6217Information AAPL589,3620.12 0.31 –368,285 90 4818.34326 47,740 –32,233 4917952,5800.13 0.35 –501,650 93 32 527.0619 97,600 –31,985 6416Technology DELLIBM885,5580.21 0.42 –308,223 80 4021.10473 71,291 –30,910 6220INTC 1,217,243 0.23 0.49 –355,752 92 35 106.37117 91,010 –29,399 5818MSFT766,5950.12 0.32 –373,071 88 3564.13128 84,315 –33,157 6020SUNW 908,1370.04 0.41 –626,068 82 45 228.6049 67,874 –35,411 5819TXN630,7030.17 0.31 –399,909 84 3887.3287 73,192 –32,759 6120TelecomVZ–23,135 –0.01 –0.01 –330,631 94 3321.52–28 45,252 –23,175 6018IndicesSPX316,1590.09 0.17 –444,865 97 30 2321.681 69,209 –25,468 5919NDX 1,121,338 0.23 0.53 –257,408 90 36 1827.656 86,380 –29,241 60185 98,176 –43,847 6221RUT 2,036,199 0.20 0.70 –453,815 72 50 5366.79Average 300,0400.04 0.13 –502,223 92 36 335.5230 62,032 –30,309 571914,000,00012,000,00010,000,0008,000,0006,000,0004,000,0002,000,0000–2,000,000
0.440.901.00
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7.15 a
Results of Moving Average Crossover Strategy Applied to Stocks.
149
Breakdown Statistics (Stocks)
6,000,0005,000,0004,000,0003,000,0002,000,0001,000,0000–1,000,000–2,000,000–3,000,000
Year199019911992199319941995
7.15 b
19911992
Sharpe Ratio3.000.77–0.51–1.17–1.793.17
1993
Year199619971998199920002001
1994
K-ratio0.020.450.35–0.25–0.25–0.12
1995
Year
1996
Net Profit by Year
Net Profit–8,4583,292,3012,316,1824,560–938,830–1,074,375
Performance Breakdown by YearK-ratio1.030.07–0.34–0.32–0.710.88
Results of Moving Average Crossover Strategy Applied to Stocks.
FIGURE
1990
Net Profit3,973,5931,708,961–739,200–1,405,681–2,191,5735,294,085
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Average Avg. Bars Avg. BarsLossWinLoss–26,13850175420–31,412–29,3325319–30,74555185918–29,0175819–31,14717–28,25861–32,2655919–23,1756018–32,8526019Profitability WindowsNum. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable1 Month1447048.61%0.003 Months1427250.70%1.266 Months1397453.24%1.2912 Months1336851.13%0.0018 Months1277055.12%–0.3924 Months1217561.98%–0.67
System Name:10 day/40 day Dual Moving Average CrossoverParameters:10 day average, 40 day averageDescription:Enter long when 10 day average crosses above 40 day average, short on cross belowRun Dates:1/1/19990 – 12/31/2001Breakdown by Market SectorAverageAvg. ProfitAverageAverageAverageAverageAverage AverageMarketPer ContractWinNet Profit K-ratio Sharpe Ratio Max DD Num Trades % WinSectorEnergy–447,529–362,04640,937108–0.0634–0,20–136Materials–811,7119930–0.16–388–0.41–917,03745,405Industrials–622,136–119,08596–0.0536–0.07–9248,478Discretionary 300,771–526,49259,645940.00370.14121Staples265,00791360.081370.14–448,76659,860Healthcare393,52388380.051140.18–499,31462,561Financials–415,016159,96296260.0761,750330.09Info. Tech.–418,994850,02576,146870.15390.37171Telecom–330,631–23,13594–0.0133–0.01–2845,252Indices1,157,899864380.1784,5880.47–385,363
Net Profit
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
150
is also dominated by similar sectors as in the channel breakout. Currencies, interest rates, petroleum, softs, technology, and stock indices all perform strongly.MomentumPerhaps the simplest strategy visited in this chapter is one that utilizes pricemomentum to generate long and short entries. Two parameter sets are tested—ashorter term 20-day momentum and a longer term 80-day momentum.In the 20-day momentum strategy, long entries are established if today’s closeis greater than the close 20 days ago. Short entries are established if today’s closeis less than the close 20 days ago. In the 80-day momentum strategy, long entriesare established if today’s close is greater than the close 80 days ago. Short entriesare established if today’s close is less than the close 80 days ago.Figure 7.16 is an example of the 20-day momentum strategy applied to theheating oil market. The indicator plotted in the lower half of the chart is a 20-daymomentum. When prices begin to rise in early September, the 20-day momentumturns above zero and generates a long entry. Later in October, prices begin to fall.Short entries are established as the 20-day momentum crosses below zero.The 20-day momentum produces strong results on futures markets but inconsistent results on stocks (Figures 7.17a through 7.18b). Profitable in 11 of the 12
FIGURE
7.16
Momentum Strategy Applied to Heating Oil.
CHAPTER 7 Dissecting Strategies Currently Available
151
Trading Strategy Evaluation (Futures)
Strategy Name:Parameters:Description:Run Dates:
20 day momentum20 day momentum triggers entries and exitsBuy if today’s close > close of 20 days ago; exit if today’s close < close of 20 days ago1/1/1990 – 12/31/2001#Avg.Avg. Avg.Sharpe%Avg.Avg.Avg. Bars BarsofProfitMarket Net Profit K-ratio RatioMax DD Trades Win Contracts Per Con. WinLoss Win LossFXAD–240,110 –0.11 –0.13 –657,880277 34 25.59–36 27,399 –15,721 206BP272,3630.04 0.14 –345,500304 37 18.2147 24,007 –12,835 166CD–16,5500.01 –0.01 –537,360259 36 45.720 30,982 –17,050 216JY1,208,8000.27 0.56 –225,625288 41 13.33282 29,137 –13,608 176SF840,9750.16 0.40 –230,538279 40 15.53200 29,526 –14,617 195RatesED2,237,2000.29 0.91 –340,725211 41 85.21125 52,017 –17,868 266TY1,056,3750.25 0.50 –252,438246 38 29.53140 36,936 –15,792 236US690,2810.22 0.33 –196,125270 37 20.24115 30,719 –14,365 215StockSP–339,700 –0.07 –0.17 –660,300314 349.37–115 25,473 –14,603 186MetalsGC301,5200.16 0.14 –393,510261 39 46.4825 27,116 –15,763 206HG-3,175–0.050.00 –534,525290 31 31.13–3 29,372 –13,545 216PL60,7150.01 0.03 –399,160301 41 45.86–1 20,719 14,375 166SL–549,855 –0.23 –0.30 –712,590341 33 33.75–55 18,669 –12,155 165EnergyCL1,604,5300.32 0.69 –201,190244 39 28.37232 39,177 –14,575 236HO1,009,9150.17 0.41 –357,504286 36 21.66166 33,865 –13,709 196HU657,9890.09 0.26 –585,220252 40 22.86113 31,992 –16,773 206GrainsC985,6750.20 0.43 –447,763283 41 77.8244 31,830 –16,371 195S22,4000.02 0.01 –561,575308 36 30.86–1 24,921 –14,099 185W356,7500.10 0.16 –515,825250 37 52.9728 32,099 –16,689 236MeatsFC–71,7250.03 –0.04 –617,485282 37 41.82–6 27,201 –16,062 196LC–452,296 –0.05 –0.22 –663,588336 36 50.51–26 23,855 –15,316 165LH482,9920.08 0.25 –386,912245 36 31.9461 32,863 –15,094 256PB–213,316 –0.04 –0.10 –575,804299 34 20.11–44 29,489 –16,605 186SoftsCC–1,078,630 –0.21 –0.49 –1,290,390 307 27 50.20–78 25,108 –14,500 216CT–37,475 –0.07 –0.02 –566,855298 32 25.31–5 31,714 –14,799 206JO–644,798 –0.17 –0.27 –1,096,418 283 31 36.15–67 26,734 –15,372 197KC794,8050.17 0.31 –316,538263 39 12.83230 30,870 –14,726 206LB142,136 –0.020.04 –1,185,224 250 32 31.2516 46,316 –21,045 246SB–486,697 –0.13 –0.24 –797,127328 31 53.28–26 27,319 –14,544 185Average 286,3700.05 0.12 –521,723272 35 33.6045 29,248 –14,753 19610,000,000
Equity
8,000,0006,000,0004,000,0002,000,000
Net Profit:Drawdown:K-ratio:
Portfolio Statistics8,591,095Sharpe ratio:–1,631,559Correlation to breakout:0.32Correlation 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-90
Jan-91
0–2,000,000
0.530.860.80
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7.17 a
Results of 20-day Momentum Strategy Applied to Futures.
7.17 b
1991
K-ratio0.310.150.290.100.120.43
1992
Sharpe Ratio0.760.541.170.680.201.66
1993
Year199619971998199920002001
1994
K-ratio0.100.320.18–0.10–0.020.23
1995
Year
1996
1997
Sharpe Ratio0.041.420.29–0.490.490.13
Net Profit by Year
Net Profit61,7491,734,574379,823–524,422736,747170,648
Performance Breakdown by Year
Results of 20-day Momentum Strategy Applied to Futures.
FIGURE
–1,000,000
–500,000
0
500,000
1,000,000
1,500,000
1990
Net Profit970,061882,5411,177,523909,262308,4121,646,924
2,000,000
Year199019911992199319941995
MarketSectorFXRatesStockMetalsEnergyGrainsMeatsSofts
Breakdown Statistics (Futures)
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
PercentProfitable56.94%63.38%71.22%82.71%88.98%91.74%
Average Avg. Bars Avg. BarsLossWinLoss–14,766196–12,006174–14,603186–13,960186–15,019216–15,720205–15,769196–15,831206
Num. ofNumber of ProfitableLength Windows Windows144821 Month142903 Months139996 Months11012 Months13311318 Months12712111124 Months
20 day momentum20 day momentum triggers entries and exitsBuy if today’s close > close of 20 days ago; exit if today’s close < close of 20 days ago1/1/1990 – 12/31/2001Breakdown by Market SectorAverageAverageAverageAverageAverageAverageAvg. ProfitAverageK-ratioSharpe Ratio Max DD Num Trades % WinWinNet ProfitPer Contract413,09699380.0828,2100.19–399,38128195–197,322995,96429,9181820.19290.44–660,300–339,700314–0.0734- 0.17–11525,473–47,699298–8–0.033623,969- 0.03–509,946–381,3041,090,8112610.20380.4517035,01123–508,388454,94229,6172800.11380.20–63,586291–4350.0028,352–0.02–560,947–218,44328812–0.073231,344–0.11–875,425
System Name:Parameters:Description:Run Dates:
Net Profit
152
CHAPTER 7 Dissecting Strategies Currently Available
153
Trading Strategy Evaluation (Stocks)
Net Profit:Drawdown:K-ratio:
Portfolio Statistics2,163,659Sharpe ratio:–6,983,168Correlation 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: 20 day momentumParameters:20 day momentum triggers entries and exitsDescription:Buy if today’s close > close of 20 days ago; exit if today’s close < close of 20 days agoRun 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 LossEnergySLB–955,125 –0.30 –0.46 –997,275 324 3415.31 –200 21,433 –15,833 166XOM –1,359,121 –0.25 –0.76 –1,435,131 360 3342.29–91 16,705 –13,863 165MaterialsAA–294,627 –0.04 –0.16 –486,388 623551.37–89 48,930 –33,972 5625DD–299,668 –0.09 –0.16 –504,303 285 3519.95–53 24,129 –14,469 196IP–599,662 –0.13 –0.34 –750,473 310 3515.64 –123 22,255 –15,033 176IndustrialsBA–417,500 –0.15 –0.21 –1,029,025 289 3720.55–75 23,302 –16,351 186GE–379,773 –0.14 –0.21 –655,041 346 3576.68–14 22,737 –14,048 165MMM –722,739 –0.23 –0.39 –1,169,792 362 3612.75 –170 18,099 –13,669 145ConsumerDIS2,565–0.06 0.00 –829,661 283 3334.931 29,713 –14,277 197–344,289 –0.16 –0.17 –672,231 321 3513.01–83 25,014 –14,875 175Discretionary GMHD–63,952 –0.05 –0.03 –640,216 303 3659.54–8 28,098 –16,550 185WMT47,1860.02