R&D Blog

Dow Theory – Multiple Time Frames | Trading Strategy (Entry)

I. Trading Strategy

Developer: Charles Dow. Concept: Trend-following strategy based on multiple time frames. The Dow Theory defines primary trends (Filter) and secondary trends (Entry/Exit). A bull trend is defined as a series of successive higher highs (HH) and higher lows (HL). A bear trend is defined as a series of successive lower lows (LL) and lower highs (LH). Research Goal: (1) Benchmarking against the base case (Dow Theory – Trend); (2) Benchmarking against alternative entry methods. Specification: Table 1. Results: Figure 1-2. Portfolio: 42 futures markets from four major market sectors (commodities, currencies, interest rates, and equity indexes). Data: 33 years since 1980. Testing Platform: MATLAB®.

II. Sensitivity Test

All 3-D charts are followed by 2-D contour charts for Profit Factor, Sharpe Ratio, Ulcer Performance Index, CAGR, Maximum Drawdown, Percent Profitable Trades, and Avg. Win / Avg. Loss Ratio. The final picture shows sensitivity of Equity Curve.

Tested Variables: Pivot_Index & Pivot_Size (Definitions: Table 1):

Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).

STRATEGY	SPECIFICATION	PARAMETERS
Auxiliary Variables:	Pivot points (DeMark definition): Supply pivot points are surrounded on either side by lower highs. Demand pivot points are surrounded on either side by higher lows. The significance of pivot points is determined by the number of surrounded highs and lows. For example, a low that has two higher lows on either side has Pivot_Size = 2.	Pivot_Size = [1, 30], Step = 1;
Setup:	Long Trades: A bear trend is a setup for the future bull trend. Based on the Dow Theory, a secondary bear trend is defined as a series of successive secondary lower lows (sLL) and secondary lower highs (sLH). Relevant lower lows and lower highs are determined by demand pivot points and supply pivot points. Short Trades: A bull trend is a setup for the future bear trend. Based on the Dow Theory, a secondary bull trend is defined as a series of successive secondary higher highs (sHH) and secondary higher lows (sHL). Relevant higher highs and higher lows are determined by supply pivot points and demand pivot points.
Filter:	Long Trades: Based on the Dow Theory, a primary bull trend is defined as a series of successive primary higher highs (pHH) and primary higher lows (pHL). Relevant higher highs and higher lows are determined by primary supply pivot points and primary demand pivot points, where: Primary_Pivot_Size = Pivot_Size * Pivot_Index. Short Trades: Based on the Dow Theory, a primary bear trend is defined as a series of successive primary lower lows (pLL) and primary lower highs (pLH). Relevant lower lows and lower highs are determined by primary demand pivot points and primary supply pivot points, where: Primary_Pivot_Size = Pivot_Size * Pivot_Index.	Pivot_Index = [1.0, 10.0], Step = 0.25;
Entry:	Long Trades: In a bullish mode (defined by the Filter), a buy stop is placed one tick above the secondary lowest high (sLH) pivot (i.e. the lowest supply pivot point of the secondary trend). Short Trades: In a bearish mode (defined by the Filter), a sell stop is placed one tick below the secondary highest low (sHL) pivot (i.e. the highest demand pivot point of the secondary trend).
Exit:	Pattern Exit: Long Trades: A sell stop is placed one tick below the secondary highest low (sHL) pivot (i.e. the highest demand pivot point of the secondary trend). Short Trades: A buy stop is placed one tick above the secondary lowest high (sLH) pivot (i.e. the lowest supply pivot point of the secondary trend). Stop Loss Exit: ATR(ATR_Length) is the Average True Range over a period of ATR_Length. ATR_Stop is a multiple of ATR(ATR_Length). Long Trades: A sell stop is placed at [Entry − ATR(ATR_Length) * ATR_Stop]. Short Trades: A buy stop is placed at [Entry + ATR(ATR_Length) * ATR_Stop].	ATR_Length = 20; ATR_Stop = 6;
Sensitivity Test:	Pivot_Size = [1, 30], Step = 1 Pivot_Index = [1.0, 10.0], Step = 0.25
Position Sizing:	Initial_Capital = $1,000,000 Fixed_Fractional = 1% Portfolio = 42 US Futures ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20
Data:	42 futures markets; 33 years (1980/01/01−2013/09/30)

Table 1 | Specification: Trading Strategy.

III. Sensitivity Test with Commission & Slippage

Tested Variables: Pivot_Index & Pivot_Size (Definitions: Table 1):

Figure 2 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $100 Round Turn).

IV. Rating: Dow Theory – Multiple Time Frames | Trading Strategy

A/B/C/D

CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

RISK DISCLOSURE: U.S. GOVERNMENT REQUIRED DISCLAIMER | CFTC RULE 4.41

Codes: matlab/dow/2/

← Previous Article