Strategy Concepts Club Issue 16 April 2016

Issue 16, April 2016
In this issue:
Early Reversal
Strategy
Aroon Strategy
Contents
Issue 16
IN THIS ISSUE
STAFF
Early Reversal Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PUBLISHER
Michael Burke
VP, Client Training and Education
This strategy utilizes a combination of exponential moving averages, volatility
measures and bar patterns in an attempt to capture new trend reversals. The
strategy exhibits both mean-reversion and trend-following characteristics.
EDITOR
Stanley Dash, CMT
VP, Applied Technical Analysis
Aroon Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SENIOR CONTRIBUTING EDITOR
Frederic Palmliden, CFA, CMT
Senior Quantitative Analyst
This strategy studies momentum by measuring time over price – that is, how long
has it been between price events? This strategy is based on the Aroon indicator
as developed by Tushar Chande.
PRODUCTION
Kristina Hunt
Media Content Coordinator
DOWNLOAD FILES
EDITOR’S MESSAGE
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Welcome to the April 2016 issue of TradeStation Labs’ Strategy Concepts Club.
We’re pleased to roll out a redesign of the Strategy Concepts Club
TradingApp page. Our goal is to make it easier for you to view and access your
subscriber benefits and easier for us to add and manage additional benefits in
the future. The page also lets us communicate with our subscriber community.
Of course, the centerpiece remains the current issue of Strategy Concepts
Club. We’ve done away with the flipbook and made the PDF available directly
from the View Current Issue button. The Bonus Feature is now published as a
stand-alone article, available only to subscribers.
The Benefits area makes it easier for you to find subscriber-only discounts
and for us to add more benefits. The What’s News section is for information
and announcements that relate to the work of technical analysis and strategy
development. And a link to the Back Issues page has been added so you can
check the archive and purchase issues that predate your subscription.
Finally, the Short Subject section will contain occasional video messages
from the editorial staff. These may preview an upcoming article, add additional
perspective to a strategy or provide other supplementary information. And we
promise – they’ll be short.
While we hope you find these changes useful, we haven’t forgotten about
the strategies. This month, Frederic Palmliden, CFA, CMT, and Senior Quantitative
Analyst, has created the Early Reversal strategy. My contribution is a strategy
built on Tushar Chande’s Aroon indicator, an analysis tool first published in 1995.
And we thank Joe Krutsinger for contributing his Tomorrow’s Trend strategy as a
bonus for our subscribers.
As always, read on and thanks for being a subscriber!
Stanley Dash, CMT
STRATEGY CONCEPTS CLUB | 1
Early Reversal
Strategy
Frederic Palmliden, CFA, CMT
Senior Quantitative Analyst
BACKGROUND
THE TSL:EARLY REVERSAL STRATEGY is an ambitious
attempt to capture a newly formed trend reversal. The strategy
utilizes multiple trading elements at the same time, from
exponential moving averages and volatility measures to bar
patterns. Among these is an Average True Range (ATR) measure
combined with various exponential moving averages to help
generate trading signals. Bar patterns are also used to determine
whether long or short trades should be taken. Interestingly,
the resulting strategy exhibits both mean-reversion and trendfollowing characteristics, since a trend reversal may not only
be a correction in the prevailing trend but also be the start of a
new trend. Some of these traits will be analyzed in detail in the
Strategy Highlights section.
The strategy presented here is applied to the E-mini
S&P‌ 500 futures contract on a daily bar interval, but other
futures and equities could also be considered. A custom
indicator is included to more easily track the strategy’s behavior.
STRATEGY ELEMENTS
The TSL:Early Reversal strategy is based on multiple strategy
elements, including exponential moving averages, the Average
True Range (ATR) and a bar pattern.
Two separate, albeit similar, sets of elements are used for
long and short entries: a particular combination of an exponential moving average, an ATR and a bar pattern is utilized
for long entries, while a different combination is used for short
entries.
Both the trend high and the trend low are updated while a
trend is developing (uptrend or downtrend). For instance, in an
uptrend, when the current high exceeds the previously recorded
trend high, the new high becomes the new trend high; the new
low, which could be higher than the previously recorded trend
low, becomes the new trend low for that particular uptrend.
2 | STRATEGY CONCEPTS CLUB
Features
u
Strategy Style: Mean reversion
Markets: Futures, equities
u T
rading Horizon: Swing trading
u
Studies/Files Included
u
Strategy
u
Indicator
u
Workspace
DOWNLOAD FILES
These levels are then used to monitor the
formation of bar patterns referred to as
BullSign and BearSign, which are used as
the set-ups for entry signals.
A BullSign occurs when the low is
greater than the most recent trend high
and remains active for a specified number
of bars. While it is active, a long signal is
generated when the close crosses over the
line formed by the ATR measure subtracted
from an exponential moving average.
A BearSign occurs when the high is less
than the most recent trend low and remains
active for a specified number of bars. While
it is active, a short signal is generated when
the close crosses under the line formed by
the ATR measure added to a different exponential moving average.
Figure 1: E-mini S&P 500 Custom Continuous Contract (@ES=107XN) Daily Bars with the TSL:Early Reversal Strategy
The TSL:Early Reversal indicator is provided to help
visualize the trade signals. The indicator is used in the
sample workspace with inputs set as listed below. The user
can make any necessary changes.
Input
Default
Description
80
Look-back length for the exponential moving
average for long entries.
EMA_Length_SE
20
Look-back length for the exponential moving
average for short entries.
ATR_Length
45
Look-back length for the average true range
calculation.
0.33
Percentage of the average true range to be
added/subtracted to/from the exponential
moving averages (e.g., 0.33 = 33%).
LX_Trail_Stop_
Length
40
Look-back length for the lowest low trailing
stop to exit long trades.
SX_Trail_Stop_
Length
25
Look-back length for the highest high trailing
stop to exit short trades.
EMA_Length_LE
ATR_Pcnt
Plot
Description
E. Rev. LE Lev
Price level for long entries.
E. Rev. SE Lev
Price level for short entries.
EMA_LE
Exponential moving average used in connection with
long entries (for reference purposes only).
EMA_SE
Exponential moving average used in connection with
short entries (for reference purposes only).
LowestLow
Lowest low trailing stop.
HighestHigh
Highest high trailing stop.
Notice that solid lines are used for the price levels used
for trade entries, while dotted lines are used for the exponential moving averages used in connection with these
price levels. By default, each set of lines is using a different
color (i.e., dark blue lines for the lines associated with long
entries and magenta lines for the lines associated with short
entries). Notice also that the distance between the solid line
and the dotted line for a particular set is dynamic, reflecting
changes in volatility as reflected by the ATR measure.
STRATEGY CONCEPTS CLUB | 3
Figure 2: TSL:Early Reversal
Strategy Signal Example
Figure 2 illustrates an example of a short entry. In
this case, a BearSign takes place on May 25, 2007, with the
bar’s high (see highlighted black dot in the middle of the
chart) lower than the TrendLow (see horizontal line in the
middle of the chart). The close subsequently crosses under
the short entry line (solid magenta line) on bar number 8
(see highlighted bar on the far right portion of the chart),
generating a short entry for the following bar.
Notice also that an Analysis Commentary window is
displayed on the top left side of the graphic. The window is
available to help keep track of the BullSign/BearSign status
as well as the selected bar’s TrendHigh and TrendLow. To
access the Analysis Commentary window, simply use the
View - Analysis Commentary menu sequence and click on
the bar where the information is needed.
It is possible that a BullSign may be active at the same
time as a BearSign and vice versa, since once activated, a
sign remains True for a specified number of bars (15 by
default) unless a trade has been generated. Also, notice
that the TrendLow number in the Analysis Commentary
window within figure 2 reflects the new TrendLow as of
that bar (i.e., the current bar’s low), not the old TrendLow
that activated the BearSign.
For long trades, positions are held until the low breaks
the lowest low for a certain number of bars. Similarly, for
short trades, positions are held until the high breaks the
highest high for the same look-back period. Solid black
lines are used by the indicator to show the price levels for
trade exits (i.e., highest high and lowest low trailing stops).
4 | STRATEGY CONCEPTS CLUB
The TSL:Early Reversal strategy inputs are displayed
in the table below.
Input
Default
Description
EMA_Length_LE
80
Look-back length for the exponential
moving average for long entries.
EMA_Length_SE
20
Look-back length for the exponential
moving average for short entries.
ATR_Length
45
Look-back length for the average true
range calculation.
ATR_Pcnt
0.33
Percentage of the average true range to
be added/subtracted to/from the exponential moving averages (e.g., 0.33 = 33%).
Counter_Max
15
Maximum number of bars that a BullSign
or BearSign can remain active.
LX_Trail_Stop_
Length
40
Look-back length for the lowest low
trailing stop to exit long trades.
SX_Trail_Stop_
Length
25
Look-back length for the highest high
trailing stop to exit short trades.
The default input values were found, in part, by
strategy optimization and sensitivity analysis (see the
sensitivity analysis comments in the Strategy Performance
Report Highlights section). Applying the strategy to other
securities would likely require adjustments to the input
values.
STRATEGY RULES
The TSL:Early Reversal strategy was applied to the E-mini
S&P 500 Continuous Contract (@ES=107XN) using daily
Figure 3: Strategy Performance
Report – Performance Summary
Tab
All performance results are hypothetical. Past
performance, actual or hypothetical, is not
necessarily indicative of future results.
bars. However, the strategy could be modified to be used on
other securities (e.g., SPY) and bar intervals using the same
basic principles. The detailed strategy rules are listed below.
Long Entries
u I f the close crosses over the level of 33% of the ATR
below the 80-day exponential moving average and a
BullSign has been generated within the last 15 bars, buy
on a market order on the next bar.
Short Entries
u I f the close crosses under the level of 33% of the ATR
above the 20-day exponential moving average and a
BearSign has been generated within the last 15 bars, sell
short on a market order on the next bar.
Exits
u When the low is below the lowest low of the last 40 bars,
exit any long on a market order on the open of the next
bar.
u W
hen the high is above the highest high of the last 25
bars, exit any short on a market order on the open of the
next bar.
STRATEGY PERFORMANCE
REPORT HIGHLIGHTS
BACK-TESTING SETTINGS
Initial Capital
$30,000
Trade Size
1 Contract
Commissions
$2.36 per side per contract
History
10 years ending 12/31/15
Bar Interval
Daily
Additional Note:
 MaxBarsBack is set to 100 in the strategy properties to
allow the user to increase the look-back length for the
strategy’s exponential moving averages.
Profit Factor
u Th
e theoretical profit factor, which is calculated by
dividing the gross profit by the gross loss, is much
higher for long trades (5.19) than for short trades
(1.61). Both the percent profitable and the average
win:average loss ratio stand out and combine to push
the profit factor higher for long trades, but additional
STRATEGY CONCEPTS CLUB | 5
trade history may be needed to assess
the robustness of the profit factor.
Figure 4: Strategy Performance Report – Performance Graphs Tab - Equity Curve Detailed
Avg. Bars in Winning Trades versus
Avg. Bars in Losing Trades
u Th
e average number of bars in winning
trades (26.67) is more than twice the
average number of bars in losing trades
(9.51). Also, notice that the figures
are very consistent for long and short
trades.
RINA Index
u Th
e RINA index, which is a risk-adjusted performance metric, is relatively
low at 69.21 for a mean-reversion
strategy. On the other hand, the figure
is actually quite good when viewed in
the context of a strategy that may be
considered a mixture of mean reversion and trend following, and given
the high percent of time in the market
(71.84%).
The equity curve is remarkably linear
in the back-tested period. However, notice
that the strategy had a rough go initially. In
fact, the performance was basically flat for
the first year after a noticeable drawdown.
The volatility of the equity curve translated
to a maximum weekly drawdown of about
25%. Notice also that there are several
shorter flat periods throughout. Overall,
the equity curve shows some of the preferred characteristics of both trend-following and mean-reversion strategies: relatively fast equity growth, relatively short
periods of sideways performance for the
most part and no extreme drawdowns.
Figure 5 reinforces the idea that the
strategy is able to capture the best part
of both types of strategy. Losing trades
are consistently small (see red circle), in
line with what would be expected from
a mean-reversion strategy. However,
winning trades are split between small
gains (see light blue circle), larger gains
(see dark blue circle), and an outlier (see
black circle), in line with what would be
expected from a trend-following strategy.
As in previous articles, instead of analyzing one strategy input in isolation, data
from TradeStation’s Strategy Optimization
Report can be used with Microsoft Excel
6 | STRATEGY CONCEPTS CLUB
All performance results are hypothetical. Past performance, actual or hypothetical, is not necessarily indicative of future results.
Figure 5: Strategy Performance Report – Trade Graphs Tab – Maximum Favorable Excursion
All performance results are hypothetical. Past performance, actual or hypothetical, is not necessarily indicative of future results.
to perform sensitivity analysis between two strategy inputs at the same
time, by creating a 3-D chart. For this optimization, the strategy inputs
that were not optimized were kept at their default values, per the table in
the Strategy Elements section above.
Figure 6 illustrates the impact on the back-tested net profit when the
ATR_Length and ATR_Pcnt input values change. The surface chart reveals
Figure 6: TSL:Early Reversal Strategy Inputs Sensitivity Analysis
a ridge formation with a fairly flat top. The chosen default
values for the two inputs are not peak values, but are near
the center of the ridge formation where the ATR_Length
input is 45 and the ATR_Pcnt is 0.33.
SUGGESTIONS FOR IMPROVEMENT
The TSL:Early Reversal strategy is technically a meanreversion strategy, but it exhibits traits of both meanreversion and trend-following strategies. Not surprisingly,
this produced back-tested performance results common
to both strategy types. The strategy also included multiple
strategy elements that were deployed at the same time and
showed how different sets of elements can be used for long
and short trades.
A possible area of improvement would be to include a
money-management technique to scale into a long or short
position in an effort to reduce drawdowns. This idea would
probably require additional strategy rules, but a simple
example to explore would be to initiate a position as soon as
a BearSign or BullSign is activated.
Overall, the strategy revealed interesting new ideas
to explore further. Several ideas that were not included in
this article were considered but did not lead to promising
outcomes. For instance, including separate ATR strategy
inputs for long and short trades did not add risk-adjusted
value in early testing. Likewise, a separate bar counter for
the BullSign and the BearSign did not seem to make a
noticeable difference, either.
Frederic Palmliden, CFA, CMT, is Senior Quantitative Analyst at TradeStation. As part of the TradeStation Labs team, he designs
custom strategies, indicators and related educational content for TradeStation publications. In addition to being a Chartered Market
Technician (CMT), Frederic holds the Chartered Financial Analyst ® designation and has 15 years’ experience in the financial services
industry, ranging from research and asset allocation strategies to proprietary trading. Frederic is also trilingual in English, French,
and Swedish.
STRATEGY CONCEPTS CLUB | 7
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Aroon Strategy
Stanley Dash, CMT
VP, Applied Technical Analysis
BACKGROUND
MOST MOMENTUM OSCILLATORS are
focused on price changes over or during a
span of bars. The convention, of course, is to
measure price over time, as represented by
bars. Much less work has been done to study
momentum by measuring time over price
– that is, how long does it take for a particular indicator event to manifest or, in the
case examined here, how long has it been
between events?
Dr. Tushar Chande published the
Aroon indicator in Technical Analysis of
Stocks and Commodities magazine in 1995.
This strategy is built on his work as documented in that article. The following quote
and those found in the Strategy Elements
section were taken directly from that article:
Tushar S. Chande, “A Time Price Oscillator,”
Technical Analysis of Stocks & Commodities,
V.13:09 (369-374).
“You can count on the markets changing
direction, just as you can count on day following the night. Like the sun, trends emerge,
rise to a peak, weaken and fade away. In
Sanskrit, aroon is the word for dawn’s early
light, the first sign of a new day or a change
from night to day. Thus, ‘aroon’ is an apt
name for an indicator that is sensitive to the
beginning of a new trend. This new indicator combines price and time in a way that
illuminates the evolution of the price trend,
9 | STRATEGY CONCEPTS CLUB
Features
u
Strategy Style: Trend following
M
arkets: Equities, futures
u Trading Horizon: Position trading
u
Studies/Files Included
Strategy
u Indicators
u Workspace
u
DOWNLOAD FILES
and you can use it to identify periods when
trend-following or antitrend strategies are
likely to succeed.”
STRATEGY ELEMENTS
Chande describes a simple pair of calculations to measure how long ago the highest
high and lowest low were made over a
fixed number of bars. The measure of each
is expressed as a percent of the bar span
(length). For example, a new high on the
current bar would return a value of 100. As
time passes from that bar without a new
high, the value drops as a percent of the bar
Figure 1: SPDR S&P 500 ETF (SPY) Daily with TSL:Aroon strategy and indicators
span. If, say, the last new high was made halfway back in the
span of bars, the indicator would return 50. Chande’s work
uses this same method to measure the time in bars since the
last new low.
Although the Aroon Up and Aroon Down values
cannot exceed 100, the values cannot quite reach 0, since
there must be a highest high and lowest low somewhere
in the span of bars. Therefore, the lowest value that can be
returned is 1 / Length * 100.
This approach has the effect of placing greater emphasis
on time than price, an unusual perspective for an indicator
of this type. There is no measure of price change or rate of
change per se. The only price consideration is whether and
when new highs and lows are made during the period, with
the resulting values expressed as a percent of the number of
bars in the length.
Three different values are calculated and plotted using
Aroon. They appear in figure 1 above.
Aroon Up
u Th
e number of bars ago that the highest high was made
expressed as a percent of the bars in the length.
Aroon Down
u Th
e number of bars ago that the lowest low was made
expressed as a percent of the bars in the length.
Aroon Oscillator
u Th
e difference between Aroon Up and Aroon
Down. This indicator can range from +100 to -100.
(Technically, this oscillator cannot reach +100 or -100
for the same reason mentioned above: Aroon Up and
Aroon Down cannot reach 0.)
STRATEGY CONCEPTS CLUB | 10
The Aroon values and their relationships are interesting
ways to summarize and visualize highs and lows in relation
to a price channel. For example, Aroon Up reaching 100
means there has been an upside breakout of a price channel
on that bar; Aroon Oscillator crossing 0 is the same as
Aroon Up and Aroon Down crossing.
In his article, Chande offers several ways to interpret
Aroon values without specifying any codified rules. The
rules offered here are derived from his interpretations with
the goal of maintaining simplicity. These direct quotes from
his article summarize the signals that have been selected
for use in the TSL:Aroon strategy. Notice that the first two
quotes express the same principle.
“…the crossover of the two lines [Aroon Up and Aroon
Down] suggesting future price direction.”
“The Aroon Oscillator … zero crossover gave good signals
for buys and sells.”
“The uptrend [Aroon Up] and downtrend [Aroon Down]
lines make useful patterns when they move parallel to one
another, indicating a consolidation…”
“A value of 50 for the Aroon Up [Down] indicator simply
means that 13 days have passed since the most recent 25-day
high, which indicates a loss of upside [downside] momentum.”
The entries in the TSL:Aroon strategy are signaled by
crossovers of Aroon Up and Aroon Down. Longs are closed
when Aroon Up weakens, and shorts are closed when
Aroon Down weakens. Finally, a period of consolidation is a
signal to close any open position.
Referring to the chart on the left in figure 2, point A
highlights Aroon Down crossing over Aroon Up (Aroon
Oscillator crossing under 0) and prompting a short entry.
The short is covered at point B when Aroon Down has
weakened, suggesting a loss of bearish momentum.
Figure 2: Aroon entries with a “weakening Aroon” short exit (left chart) and a “consolidating Aroon” long exit (right chart)
11 | STRATEGY CONCEPTS CLUB
Point C in the chart on the right in figure 2 marks
Aroon Up crossing over Aroon Down (Aroon Oscillator
crossing over 0), prompting a long entry. The long is liquidated at point D following a period of consolidation, as evidenced by the parallel movement of Aroon Up and Aroon
Down (Aroon Oscillator moving sideways).
In addition to the strategy, two Aroon indicators are
included. Remember to set the inputs for these indicators to
the same values used in the strategy so the visual cues match
the trading signals. The TSL:Aroon_Up_Down indicator
plots both Aroon Up and Aroon Down.
Description
In addition to a Length input, the TSL:Aroon strategy
includes two inputs for the exit rules.
Input
Default
Description
Length
25
Span of bars for Aroon calculations
ExitValue
65
Aroon value that generates an exit signal
ConsolBars
8
Consecutive bars of parallel Aroon movement (unchanged Aroon oscillator) that
generates an exit signal
STRATEGY RULES
The strategy rules for TSL:Aroon are summarized here, with
reference to the exit inputs listed above.
Input
Default
Length
25
Span of bars for Aroon calculations
ReferenceLine1
40
Value for horizontal reference line
Long Entries
ReferenceLine2
60
Value for horizontal reference line
u I f Aroon Up crosses over Aroon Down (equivalent to
the Aroon Oscillator crossing over 0), then buy on the
open of the next bar.
Plot
Description
Aroon Up
Aroon Up value
Aroon Down
Aroon Down value
RefLine1
Horizontal reference line
RefLine2
Horizontal reference line
Alert Criteria
Alert Text
Up crossing over Aroon
Aroon Up crosses over Aroon Down “Aroon
Down”
Down crossing over Aroon
Aroon Down crosses over Aroon Up "Aroon
Up"
The TSL:Aroon Oscillator indicator plots the Aroon
Oscillator separate from Aroon Up and Aroon Down.
Input
Default
Description
Length
25
Span of bars for Aroon calculations
ReferenceLine
0
Value for horizontal reference line
Plot
Description
Aroon Osc
Aroon oscillator value
RefLine
Horizontal reference line
Alert Criteria
Alert Text
Aroon Oscillator crosses over 0
"Aroon Oscillator crossing over 0"
Aroon Oscillator crosses under 0
"Aroon Oscillator crossing under 0"
Short Entries
u I f Aroon Down crosses over Aroon Up (equivalent to
the Aroon Oscillator crossing under 0), then sell short
on the open of the next bar.
Exits
u If Aroon Up weakens below the value of the input
ExitValue, then sell at the open of the next bar.
u I f Aroon Down weakens below the value of the input
ExitValue, then buy to cover at the open of the next bar.
u I f Aroon Up is greater than Aroon Down and the two
are moving lower in parallel on a series of bars (equivalent to the Aroon Oscillator moving sideways), then
sell next bar at market. The number of bars in the series
defining a consolidation is controlled by the input
ConsolBars.
u I f Aroon Down is greater than Aroon Up and the two
are moving lower in parallel on a series of bars (equivalent to the Aroon Oscillator moving sideways), then buy
to cover next bar at market. The number of bars in the
series to define a consolidation is controlled by the input
ConsolBars.
STRATEGY CONCEPTS CLUB | 12
Figure 3: Strategy Performance
Report – Performance Summary
tab
All performance results are hypothetical. Past
performance, actual or hypothetical, is not
necessarily indicative of future results.
STRATEGY PERFORMANCE
REPORT HIGHLIGHTS
BACK-TESTING SETTINGS
The following input values were found
through a general series of optimizations
and are not necessarily optimal values in
themselves.
Input
Value
Length
29
ExitValue
69
ConsolBars
8
Trade Size
$25,000, rounded down to the
nearest 10 shares, minimum 50
shares
Commissions
$.01 per share
History
10 years ending 12/31/2015
Bar Interval
Daily
13 | STRATEGY CONCEPTS CLUB
In reviewing the data on the Strategy Performance Report –
Performance Summary tab, it is clear that the long side has more favorable
metrics in almost all fields. And while the short side results are acceptable,
it should be noted that there is a large positive-outlier short trade that is
the Largest Winning Trade in figure 3. (Outliers are identified on the Trade
Analysis tab of the Strategy Performance Report.)
Profit Factor
u W
hile favoring the long side, this metric is in a reasonable range for
trend following.
Percent Profitable
u The win rate exceeds what might generally be expected for a trend-following strategy.
Ratio Avg. Win:Avg. Loss
u Both long and short trades show this ratio at around 2. This is particularly reassuring when viewed alongside the Percent Profitable.
Avg. Bars in Winning Trades / Avg. Bars in Losing Trades
u Holding periods for winning trades exceeded those for losing trades, as
should be the case for trend following. Clearly, however, the long side
was much more favorable, with winners being held 2.4 times longer than
losers.
Figure 4: Strategy Performance
Report – Performance Graphs tab
- Equity Curve Line
All performance results are hypothetical. Past
performance, actual or hypothetical, is not
necessarily indicative of future results.
Total Shares/Contracts Held
u Results in these articles are often shown based on a fixed trade size such
as 100 shares or 1 contract. In this case, an ongoing commitment of
$25,000 was selected due to the large range in the price of SPY in the
10-year test period, a range of approximately 147 points. The strategy
generated 73 signals and the total shares held were 12,400, indicating
an average trade size of 170 shares. This is useful in comparing these
results to a fixed trade size of 100 shares. For example, are these results
showing more than 170% of the profit for the same strategy traded with
100 shares? That, along with risk-adjusted metrics, begins addressing the
question of whether there was a payoff for the larger positions.
Percent of Time in the Market
u At about 55% (not shown), the percent of time in the market is modest
for a trend-following strategy
Stanley Dash, CMT is Vice-president, Applied Technical Analysis, at
TradeStation. He and his group support active and institutional traders
with analytical tools and education designed to help them become more
effective traders.
His Wall Street career began in 1975 and includes time as an active
floor trader at one of the leading U.S. futures and options exchanges. Mr.
Dash has lectured for the New York Institute of Finance and the Institute for Financial Markets.
He is also a Chartered Market Technician and a member of the Market Technicians Association,
where he serves on the Editorial Board of the Association’s Journal of Technical Analysis.
SUGGESTIONS FOR
IMPROVEMENT
The logic in the strategy allows for the possibility of early exits, profitable or not, with
no rules for a reentry. For example, a weakening Aroon Up might prompt an exit from
a long position and the trend might resume
without the opportunity for a new crossover
to generate an additional buy signal. This
is a common challenge in trend-following
strategies. In this case, an Aroon value of
100, i.e., a channel breakout, in the same
direction as the last signal might be a useful
reentry.
Another level of analysis could be
added by employing a second set of Aroon
calculations based on a different length.
Perhaps a long (slow) length might be used
to set the trend bias and a short (fast) length
used for signals only in the direction of that
trend.
Finally, this article used daily bars in
the examples. The strategy may be applied
to other intervals, with different Length
values, particularly for intraday trading.
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