0.02 –375,945 280 3938.913 25,740 –15,993 186ConsumerG –1,169,342 –0.27 –0.58 –1,248,970 313 2936.55 –106 26,412 –16,471 186KO–221,768–0.08–0.10–657,7472963427.85-2527,554–15,121196StaplesMO748,2990.29 0.39 –208,049 302 4023.14107 25,937 –13,218 185PG –1,252,387 –0.32 –0.58 –1,514,795 338 3121.62 –170 22,422 –15,611 175HealthcareAMGN 532,0020.04 0.22 –594,800 316 3256.5929 35,220 –13,884 205BMY –688,343 –0.03 –0.36 –823,276 329 3636.23–59 20,605 –15,027 165JNJ–865,251 –0.15 –0.41 –1,243,533 312 3637.99–72 22,709 –17,183 176PFE322,1120.12 0.17 –281,875 286 3880.4613 25,068 –13,960 196FinancialsAIG632,3610.19 0.35 –330,226 278 4037.1161 27,213 –14,577 186FNM –928,974 –0.24 –0.49 –933,024 317 3224.48 –119 23,351 –15,179 186MER443,7940.11 0.22 –323,894 253 3548.5436 34,065 –15,464 236InformationAAPL 1,000,862 0.18 0.54 –289,070 285 3917.92195 28,675 –12,336 195DELL 1,278,125 0.22 0.53 –367,356 250 39540.009 39,541 –17,505 216TechnologyIBM 1,485,401 0.27 0.70 –445,355 241 3918.39305 37,257 –14,277 236INTC 1,970,394 0.36 0.82 –259,640 250 41112.5170 41,264 –15,177 216MSFT 643,4050.08 0.28 –346,784 285 3366.2031 35,008 –14,382 206SUNW 227,2580.01 0.10 –439,377 283 36201.464 31,610 –16,834 215TXN222,2720.11 0.10 –437,504 260 3779.319 32,991 –17,835 216TelecomVZ –1,452,631 –0.38 –0.76 –1,607,757 318 3120.17 –225 20,695 –15,944 186IndicesSPX178,8430.05 0.09 –541,793 298 31 2366.380 32,051 –13,195 206NDX 1,089,513 0.21 0.53 –272,123 319 37 1686.542 31,797 –13,421 1853 67,372 –16,443 286RUT 3,354,420 0.43 1.34 –228,710 199 39 4852.00Average 63,637–0.01 0.01 –674,739 290 36317.42–24 29,264 –15,646 20610,000,0008,000,0006,000,0004,000,0002,000,0000–2,000,000
0.100.870.79
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7.18 a
Results of 20-day Momentum Strategy Applied to Stocks.
Breakdown Statistics (Stocks)
7.18 b
1990
Net Profit2,158,2783,712,911–578,265–1,228,554–827,2512,414,329
199119921993
Results of 20-day Momentum Strategy Applied to Stocks.
FIGURE
–3,000,000
–2,000,000
–1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
Year199019911992199319941995
1994
Year
1995
1996
1997
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe RatioK-ratio Sharpe Ratio–1,031,01819960.50–0.071.09–0.4219972,041,2960.230.251.600.65581,269–0.3319980.10–0.440.26–1,483,1061999–0.42–0.49–0.75–0.92–2,013,818–0.152000–0.47–0.61–1.082001–1,444,2200.40–0.241.62–0.86Net Profit by Year
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Num. ofNumber of Profitable PercentLength Windows Windows Profitable1446847.22%1 Month1426545.77%3 Months1396244.60%6 Months1336145.86%12 Months1276349.61%18 Months1215948.76%24 Months
System 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 agoBreakdown by Market SectorRun Dates:1/1/1990 – 12/31/2001Average Avg. Bars Avg. BarsAverageAverageAverage Avg. ProfitAverageAverageAverageAverageMarketLossWinLossWinK-ratio Sharpe Ratio Max DD Num Trades % Win Per ContractNet ProfitSectorEnergy–1,216,203–1,157,12319,069342–0.28–14,84834–0.6116–1465Materials–580,388–397,986219–0.09–21,15835–0.2231–881231,771Industrials–951,286–506,671332–0.17–14,69036–0.2716–86521,379Discretionary –89,62329735–0.0618–22–0.04627,141–629,513–15,424Staples–907,390–473,800312–0.10–15,10534–0.2218–49525,581Healthcare–735,871–174,87025,900311–0.01–15,01436–0.1018–225Financials–529,04849,06028,210283–15,0730.02360.0320–76Info. Tech.–369,298975,388265–15,4780.18380.442189635,192Telecom–1,452,63131831–0.3818–225–0.766–1,607,75720,695–15,944Indices–347,5421,540,925272260.2343,740360.65–14,35322Profitability Windows
Net Profit
154
CHAPTER 7 Dissecting Strategies Currently Available
155
years on futures but only five of 12 years on stocks, the 20-day momentum strategy’s returns are highly correlated to both the 40-day entry/20-day exit channelbreakout and a 10-day/40-day moving average crossover strategy.Note the dichotomy of performance on the stock side. Very strong performanceis generated on technology stocks and on stock indices, with every market producing profits. Yet when we look at the energy, materials, and industrial sectors, all eightmarkets led to losses. This split performance is becoming very prevalent and leadsme to believe that some sectors are more apt to trend than other sectors.In addition to the 20-day momentum, an 80-day momentum strategy was alsotested (Figures 7.19a through 7.20b). In both futures markets and stocks, the 80day momentum strategy produces higher Sharpe ratios and higher K-ratios. Thisimproved performance is due to the enhanced profitability of the petroleum andsoft sectors in the tests of futures, and health care and consumer discretionary sectors in the stock tests.Volatility BreakoutWe also test the performance of a volatility breakout strategy. In this version, weenter long if today’s price change is greater than twice the standard deviation ofprice changes over the past 100 days. We enter short if today’s price change is lessthan negative two times the standard deviation of price changes over the past 100days. There are no other entry rules and no rules for exiting positions, except foran entry in the other direction.The chart below (Figure 7.21) of Fannie Mae (FNM) details entries generatedby our volatility breakout strategy. The strong one-day rise in late March was theonly day strong enough to generate a trading signal in this example. The rise waslarge enough that a buy order was placed for the next morning’s opening.The performance of the volatility breakout strategy leads to results somewhatbackward to the tests examined thus far (Figures 7.22a through 7.23b).Profitability on stocks is somewhat strong, while tests on futures barely eke out aprofit over the 12 years of the back-test. Correlation to the channel breakout andmoving average crossover strategies is on average about 0.50, suggesting that wemay incorporate some benefits of diversification by adding this strategy to ourtrading program.StochasticsOscillators are also tested in our performance details. The first uses a 14-day Slow%K stochastic to generate long and short entries (refer to Chapter 3 for a detailedexplanation on the derivation of the Slow %K, RSI, and MACD oscillators). Longentries are established when today’s 14-day Slow %K stochastic falls below 20 andthen crosses back above 20. Short entries are established when today’s 14-day
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Trading Strategy Evaluation (Futures)Strategy Name:Parameters:Description:Run Dates:
FX
RatesStockMetals
EnergyGrainsMeats
Softs
80 day momentum80 day momentum triggers entries and exitsBuy if today’s close > close of 80 days ago; exit if today’s close < close 80 days ago1/1/1990 – 12/31/2001Avg.#Avg. Avg.SharpeAvgAvg. Bars Bars%Avg.ProfitofMarket Net Profit K-ratio Ratio Max DD Trades Win Contracts Per Con. WinLoss Win LossAD–53,3900.05 –0.03 –369,570 1653425.72–15 28,760 –15,343 369BP–207,750 –0.11 –0.10 –890,925 1823617.72–80 24,698 –16,272 2910CD108,5500.060.05 –320,690 1353746.516 32,743 –18,846 439JY1,480,200 0.340.73 –215,013935313.031,139 46,165 –20,042 5210SF382,5130.060.20 –215,963 1073414.97254 45,470 –17,316 5713ED2,171,300 0.150.90 –306,575883279.91140 71,313 –16,813 798TY731,4690.270.32 –230,719 1353728.10197 41,759 –15,770 506US887,3750.280.44 –380,125 1114221.25376 42,355 –17,252 538SP–218,8250.01 –0.11 –698,850 153308.95–154 38,173 –18,377 468GC109,8900.050.05 –515,420 1243344.6019 34,419 –15,718 5211HG567,2250.100.30 –398,325 1203233.68135 49,671 –16,355 5411PL178,875 –0.020.08 –877,635 1542950.7519 47,832 –18,420 3911SL–645,880 –0.18 –0.31 –956,165 1932730.75–117 25,455 –14,298 378CL2,266,660 0.310.88 –184,980974129.73725 75,627 –16,391 5712HO1,767,402 0.210.60 –276,864 1333225.51462 66,900 –14,531 499HU1,673,839 0.290.61 –263,802 1134021.93627 56,174 –14,330 4812C1,547,663 0.160.45 –469,350 1294075.38157 58,349 –19,588 4310S–322,500 –0.07 –0.16 –470,413 1523630.22–76 25,199 –17,871 3113W840,0380.150.39 –197,363 1023651.89156 56,656 –19,537 6310FC–167,295 –0.02 –0.08 –832,785 1652939.87–30 40,651 –18,353 3610LC74,576–0.030.04 –494,868 1652847.04–9 36,125 –14,964 438LH477,6960.100.22 –449,308 1073732.99132 43,936 –19,257 599PB–161,7400.00 –0.07 –525,592 1473120.36–55 35,759 –17,382 3912CC174,230 –0.020.00 –672,420 1133148.186 40,789 –17,860 6210CT797,5550.080.40 –469,535 1303024.08106 47,246 –16,597 509JO–139,043 –0.01 –0.06 –439,710 1663536.65–23 26,068 –15,319 368KC1,453,515 0.190.45 –275,794 1363410.86843 54,439 –13,981 3711LB1,193,984 0.190.37 –318,136 1193336.19257 62,003 –16,389 617SB157,2360.040.08 –373,173 1312953.9323 41,171 –15,049 617Average 570,8460.090.22 –436,336 1293333.36174 43,197 –16,274 479
Net Profit:Drawdown:K-ratio:
Portfolio Statistics17,125,366Sharpe ratio:–1,302,645Correlation to breakout:0.53Correlation 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
20,000,00018,000,00016,000,00014,000,00012,000,00010,000,0008,000,0006,000,0004,000,0002,000,0000–2,000,000
1.010.710.65
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7.19 a
Results of 80-day Momentum Strategy Applied to Futures.
157
Breakdown Statistics (Futures)
7.19 b
19911992
1993
Results of 80-day Momentum Strategy Applied to Futures.
FIGURE
–500,000
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1990
Net Profit1,944,5701,421,135–53,122697,8022,479,1421,815,731
3,000,000
Year199019911992199319941995K-ratio0.530.020.710.090.810.13
1994
1995Year
Average Avg. Bars Avg. BarsLossWinLoss4310–17,564–12,459455–18,3774684610–16,198–15,0845111–18,9984611–17,4894410519–15,866
1997
1998
2000
2001© 2002 Lars Kestner – All Rights Reserved
1999
Num. ofNumber of Profitable PercentSharpe RatioLength Windows Windows Profitable14459.72%1.331 Month8614271.83%0.783 Months10284.89%1391.816 Months11894.74%0.2012 Months1331261272.1097.64%18 Months12499.17%0.1624 Months121120
1996
Net Profit by Year
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio2,312,2520.6419961.39828,5930.1919970.892,331,2340.041998–0.04508,32519990.010.562,546,62920000.651.67346,26320010.611.93
System Name:80 day momentumParameters:80 day momentum triggers entries and exitsDescription:Buy if today’s close > close of 80 days ago; exit if today’s close < close of 80 days agoBreakdown by Market SectorRun Dates:1/1/1990 – 12/31/2001AverageAverage Avg. ProfitAverageAverageAverageAverageAverageMarketWinK-ratio Sharpe Ratio Max DD Num Trades % Win Per ContractNet ProfitSector342,025FX1360.08390.17261–402,43235,567Rates–229,355947,536840.18280.4117838,857Stock–698,850–218,82538,1731530.0130–0.11–154Metals52,528148–0.01300.031439,344–686,886Energy–241,8821,902,6331140.27380.7060566,234Grains–379,042688,4001280.08380.237946,735Meats–575,63855,80939,1181460.01310.0310Softs606,246133320.082020.2245,286–424,795
Net Profit
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Trading Strategy Evaluation (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 – 12/31/2001#Avg.Avg. Avg.Sharpe%Avg.Avg.Avg.ofProfitBars BarsMarket Net Profit K-ratio Ratio Max DD Trades Win hrs (000) Per Con. WinLossWin LossSLB–30,7360.02 –0.02 –354,552 146 34 16.80–21 32,477 –17,450 449EnergyXOM –1,024,557 –0.05 –0.53 –1,082,357 217 30 43.01–113 22,284 –16,694 258AA–764,729 –0.15 –0.37 –900,286 86 40 49.41–184 39,657 –40,944 5222MaterialsDD–219,943 0.06 –0.11 –413,265 160 38 21.81–55 26,927 –18,522 3310IP–1,554,915 –0.36 –0.74 –1,649,070 226 30 16.92–405 16,515 –16,919 2011BA–189,983 –0.02 –0.09 –880,414 163 33 22.85–94 31,454 –18,353 3510IndustrialsGE643,0850.13 0.33 –327,676 128 39 73.0969 40,808 –17,854 4510MMM –970,735 –0.25 –0.53 –1,024,748 170 31 13.26–436 21,969 –18,354 3410DIS412,5400.15 0.19 –203,136 138 36 37.5561 34,691 –16,142 448Consumer351,2830.14 0.18 –244,393 104 38 12.26229 33,725 –16,517 5114Discretionary GMHD421,3110.04 0.19 –607,569 138 34 55.7954 44,719 –18,520 4211WMT170,0120.04 0.09 –327,881 178 40 32.5125 24,487 –14,904 327G877,9300.27 0.45 –188,131 110 39 35.08204 43,661 –16,297 577ConsumerKO–126,352 0.05 –0.05 –752,323 149 28 29.31–29 51,725 –20,820 4112StaplesMO–2