Trades Win hrs (000) Per Con. WinLoss Win LossEnergySLB–922,740 –0.30 –0.57 –983,769 803416.46 –712 35,353 –35,704 4518XOM –364,634 –0.05 –0.23 –505,044 703140.45 –129 51,130 –31,031 5918MaterialsAA–728,358 –0.14 –0.43 –762,548 793548.67 –189 35,906 –33,995 4620DD–806,479 –0.14 –0.51 –879,719 802621.69 –465 53,332 –32,652 5118IP–1,041,149 –0.34 –0.66 –1,053,199 792317.01 –775 46,377 –30,753 4821IndustrialsBA–72,046 –0.10 –0.05 –457,223 703021.17–51 61,956 –28,085 5520GE177,069 0.030.12 –396,528 683778.673359,094 –30,239 4921MMM –798,566 –0.22 –0.55 –943,261 752713.49 –828 37,935 –29,015 4920ConsumerDIS–253,275 –0.16 –0.15 –573,813 723138.10–94 63,088 –32,890 4920GM464,197 0.060.27 –260,562 625013.56534 45,227 –30,739 5019DiscretionaryHD264,242 –0.030.15 –717,144 683760.385366,271 –33,503 5721WMT46,683 –0.020.03 –430,631 693840.191753,549 –31,300 5222G–141,907 0.02 –0.09 –331,005 703936.65-6845,501 –32,627 4820ConsumerKO–424,481 –0.11 –0.21 –612,652 793525.60 –210 52,890 –37,361 4617StaplesMO745,751 0.220.43 –206,970 644124.83464 69,274 –28,001 5620PG–313,617 –0.12 –0.17 –502,606 763720.64 –195 44,133 –32,124 4419HealthcareAMGN 904,624 0.100.40 –325,872 693953.44247 86,209 –33,712 5520BMY –416,829 –0.01 –0.23 –560,163 703733.96 –182 43,951 –35,792 5420JNJ–520,943 –0.07 –0.31 –999,882 773637.37 –181 40,257 –33,635 4520PFE171,365 0.080.11 –365,067 713978.652948,683 –27,957 4719FinancialsAIG–420,340 –0.14 –0.26 –639,357 763442.16 –131 46,534 –32,605 5318FNM –349,812 –0.09 –0.22 –614,446 693023.76 –197 59,341 –32,687 5119MER341,289 0.110.20 –303,739 664254.279563,189 –37,582 5117InformationAAPL543,640 0.120.35 –164,887 655217.83438 45,060 –33,049 4521DELL 1,154,846 0.150.51 –428,065 6548603.922976,570 –36,360 5018TechnologyIBM740,490 0.140.42 –404,549 693919.59491 74,016 –31,795 5119INTC 1,215,281 0.240.54 –331,883 6933119.06143 117,076 –32,966 5818MSFT 480,007 0.060.22 –374,414 713466.179793,991 –38,284 5916SUNW 880,922 0.110.48 –212,837 6545224.856064,741 –27,683 5420TXN122,822 0.100.07 –302,312 713885.222159,623 –33,641 5218TelecomVZ–406,576 –0.16 –0.30 –475,919 713522.40 –266 33,682 –27,517 4822IndicesSPX-193,000 0.01 –0.12 –529,246 7134 2325.43-159,236 –34,355 5319NDX745,397 0.160.39 –319,911 6838 1807.68683,190 –34,341 56188110,446 –33,623 5520RUT 2,687,669 0.371.05 –157,388 5954 5319.25Average 103,281 0.000.02 –503,724 7137336.84–56 59,612 –32,577 511910,000,0008,000,0006,000,0004,000,0002,000,0000–2,000,000
Net Profit:Drawdown:K-ratio:
Portfolio Statistics3,511,542Sharpe ratio:–5,100,466Correlation to breakout:0.06Correlation 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:
0.161.000.90
© 2002 Lars Kestner – All Rights Reserved
FIGURE
7.12 a
Results of Channel Breakout Strategy Applied to Stocks.
7.12 b
199119921993
1994
K-ratio–0.020.170.09–0.42–0.27–0.32
1995
Year
1996
Net Profit by Year
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio–62,3330.5519961.291,306,09019970.121.25669,032–0.331998–0.73–635,023–0.691999–1.962000–1,086,564–0.41–0.922001–2,089,4400.762.29
Results of Channel Breakout 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
1990
Net Profit2,211,3342,908,152–790,907–1,569,699–1,315,0953,892,735
5,000,000
Year199019911992199319941995
AverageWin43,24245,20552,99557,03452,94954,77556,35575,86833,68284,291
1997
1998
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Average Avg. Bars Avg. BarsLossWinLoss–33,3685218–32,46649205120–29,113–32,1085220–32,5284819–32,77450205118–34,291–33,3975319–27,517482219–34,10654Profitability WindowsNum ofNumber of Profitable PercentLength Windows Windows ProfitableSharpe Ratio14462–0.0343.06%1 Month142620.4843.66%3 Months139650.3946.76%6 Months13354–0.2640.60%12 Months12763–0.5349.61%18 Months12164–1.3752.89%24 Months
Breakdown Statistics (Stocks)
40 day entry/20 day exit channel breakout40 day extreme for entry, 20 day extreme for exitEnter on a 40 day extreme close; exit on a 20 day extreme close1/1/1990 – 12/31/2001Breakdown by Market SectorAverageAverageAvg. ProfitAverageAverageAverage AverageMarketPer ContractNet Profit K-ratio Sharpe Ratio Max DD Num Trades % WinSectorEnergy–744,407–643,687 –0.177533–0.40–421Materials–898,489–858,662 –0.217928–0.53–476Industrials–231,181 –0.107131–0.16–282–599,004Discretionary 130,462–495,53868–0.04390.07128Staples72–33,564–2380.00–0.01–413,308Healthcare–562,74634,554720.0338–0.01–222Financials–142,954 –0.047036–0.10–78–519,181Info. Tech.734,001680.13410.37183–316,992Telecom–475,919–406,576 –0.167135–0.30–266Indices–335,5151,080,0226640.18420.44
System Name:Parameters:Description:Run Dates:
Net Profit
144
CHAPTER 7 Dissecting Strategies Currently Available
145
Dual Moving Average CrossoverWe use crosses of two moving averages for creating trading signals. A 10-day and40-day simple moving average are calculated every day. Long entries are established if the 10-day average crosses above the 40-day average. Short entries areestablished if the 10-day average crosses below the 40-day average. Positions areexited on an entry signal in the opposite direction.The chart below (Figure 7.13) applies the dual moving average crossover toDell Computer (DELL). In mid-January the 10-day moving average falls below the40-day moving average. This break generates a short entry. Later, in the beginningof March, prices rally and the 10-day average crosses above the 40-day average.This cross causes us to close short positions and establish a long position.The dual moving average crossover also shows strong performance over thebasket of markets tested (Figures 7.14a through 7.15b). Eleven of the 12 yearsproduced profits on the futures side, while six of the 12 years produced profitson the stock side. The dual moving average crossover outperforms the channelbreakout strategy above, producing higher Sharpe ratios and higher K-ratios onboth futures markets and stocks. The similarity between the channel breakout andmoving average crossover is noted by the high correlation in returns. Correlationis 0.90 for both futures and stocks. Performance in the moving average crossover
FIGURE
7.13
Moving Average Crossover Strategy Applied to Dell.
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
146
Trading Strategy Evaluation (Futures)Strategy 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:1/1/1990 – 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–283,740 –0.07 –0.14 –563,400983425.53–112 47,453 –28,387 5717BP–492,850 –0.10 –0.25 –946,238 109 3718.22–248 33,859 –26,768 4219CD253,3600.05 0.11 –343,540953846.006658,778 –31,006 5219JY1,582,763 0.52 0.77 –167,675714413.531,500 79,090 –25,274 7119SF673,8750.13 0.35 –324,263903916.0547966,374 –29,649 5917RatesED2,865,075 0.17 1.00 –265,000724492.00431 132,438 –34,577 7018TY1,265,172 0.15 0.61 –259,078764229.0157275,016 –25,915 6819US619,5310.12 0.30 –395,844843820.0436067,624 –29,978 6418StockSP31,9750.03 0.02 –399,138 101 348.89–1549,615 –25,376 5218MetalsGC660,4000.21 0.29 –275,570834745.1417452,407 –31,615 5619HG19,0000.04 0.01 –661,713803631.313061,266 –33,386 6621PL–736,150 –0.26 –0.41 –1,086,165 982948.67–166 43,622 –28,725 5421SL–465,810 –0.05 –0.25 –621,785963133.74–160 41,634 –26,782 5321EnergyCL968,8800.10 0.42 –338,970883829.0636477,225 –29,409 5818HO713,2100.06 0.30 –398,538843923.7933069,215 –31,861 5621HU381,4610.04 0.16 –395,531953922.4618760,454 –31,675 5019GrainsC741,0250.16 0.30 –321,963774576.2912268,696 –40,115 6517S–24,400 –0.05 –0.01 –630,050934631.82–1738,131 –33,785 4818W942,1380.19 0.41 –351,463703950.7726891,598 –35,393 7622MeatsFC59,5500.04 0.03 –444,240993340.961356,167 –27,262 5319LC–99,276 –0.05 –0.05 –556,128893349.80–2158,156 –29,652 6618LH–400,416 –0.04 –0.20 –508,260873031.81–144 59,571 –31,913 6422PB–9,104 –0.060,00 -–554,184863421.38–3160,091 –31,571 6320SoftsCC–507,570 –0.12 –0.26 962,120923549.99–125 41,825 –31,894 5222CT629,1900.06 0.30 –498,685763324.5633989,745 –31,571 7322JO–830,895 –0.13 –0.36 –1,224,758 102 2536.25–227 58,811 –30,004 5421KC1,033,564 0.15 0.34 –442,819883912.2097478,211 –29,883 5917LB483,9760.02 0.16 –805,632 105 3430.3014777,692 –33,767 5116SB360,6060.04 0.19 –380,475993652.767158,429 –27,482 5417Average 347,8180.04 0.14 –504,107863633.7417261,773 –29,489 5718
Net Profit:Drawdown:K-ratio:
Portfolio Statistics10,434,539Sharpe ratio:–2,069,680Correlation 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
12,000,00010,000,0008,000,0006,000,0004,000,0002,000,0000-2,000,000
0.680.901.00
© 2002 Lars Kestner –All Rights Reserved
FIGURE
7.14 a
Results of Moving Average Crossover Strategy Applied to Futures.
147
Net Profit2,509,7802,097,7811,932,2741,223,970794,5251,100,609
Year199019911992199319941995
7.14 b
AverageSharpe Ratio0.170.480.02–0.090.290.23–0.060.06
199119921993
1994
1995
Year
1996
1997
1998
AverageWin57,11168,76949,61549,73268,96466,14258,49667,452
2000
2001
© 2002 Lars Kestner – All Rights Reserved
1999
Average Avg. Bars Avg. BarsLossWinLoss5618–28,2175014–22,618–25,3765218–30,12757205519–30,981–36,43163196120–30,100–30,7675719Num. ofNumber of Profitable PercentSharpe Ratio Length Windows Windows Profitable144810.0156.25%1 Month142960.4267.61%3 Months139990.0571.22%6 Months106–0.4079.70%12 Months133990.0977.95%18 Months127121950.7978.51%24 Months
Avg. ProfitPer Contract337341–15–30294124–46196
Net Profit by Year
K-ratio0.06–0.010.01–0.320.010.38
Average AverageAverageMax DD Num Trades % Win9338–469,0235831–229,980–399,138101348936–661,3088939–377,680–434,49280439032–515,703–719,0819434
Performance Breakdown by YearYearNet ProfitK-ratio Sharpe Ratio15,80219960.772.36514,92119970.381.4947,9060.6019981.770.13–940,8240.8619990.3282,9970.5420000.121,086,42420011.07
AverageK-ratio0.100.110.03–0.010.070.10–0.030.00
Results of Moving Average Crossover Strategy Applied to Futures.
FIGURE
1990
AverageNet Profit346,6821,187,44531,975–130,640687,850552,921–112,312194,812
3,000,0002,500,0002,000,0001,500,0001,000,000500,0000–500,000–1,000,000–1,500,000
Breakdown Statistics (Futures)
10 day/40 day Dual Moving Average Crossover10 day average, 40 day averageEnter long when 10 day average crosses above 40 day average, short on cross below1/1/1990 – 12/31/2001Breakdown by Market Sector
MarketSectorFXRatesStockMetalsEnergyGrainsMeatsSofts
System Name:Parameters:Description:Run Dates:
Net Profit
PART 2 Harnessing the Power of Quantitative Techniques to Create a Trading Program
148
Trading Strategy Evaluation (Stocks)
Net Profit:Drawdown:K-ratio:
Portfolio Statistics10,201,347Sharpe ratio:–5,408,733Correlation 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: 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:1/1/1990 – 12/31/2001#Avg. Avg.Avg.Sharpe%Avg.Avg.Avg.ofBars BarsProfitWin LossMarket Net Profit K-ratio Ratio Max DD Trades Win hrs (000) Per Con. WinLossEnergySLB–284,844 0.02 –0.15 –390,227 109 3716.49 –171 41,112 –28,281 4716XOM –439,248 –0.15 –0.24 –504,830 107 3139.87 –101 40,761 –23,995 5317MaterialsAA–577,814 –0.09 –0.29 –713,171 92 3352.11 –118 46,954 –31,842 5522DD–662,924 –0.10 –0.33 –773,994 104 3020.21 –320 48,803 –29,932 5219IP–1,194,395 –0.30 –0.60 –1,263,94