R&D Blog
Long Equity Trading System | Trading Strategy (Filter & Exit)
I. Trading Strategy
Developer: Bruce Babcock; Source: Babcock, B. (1997). The 80% Solution S&P Systems. Sacramento, CA: The Reality Based Trading Company. Concept: The long equity trading system based on a time series momentum. Research Goal: Performance verification of the simple price momentum model. Specification: Table 1. Results: Figure 1-2. Trade Setup: Yesterday’s 11-day Momentum is greater than the 11-day Momentum of two days ago. Portfolio: Five equity futures markets (DJ, MD, NK, NQ, SP). Data: 36 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: Look_Back & N (Definitions: Table 1):
Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).
| STRATEGY | SPECIFICATION | PARAMETERS |
| Auxiliary Variables: | Time Series Momentum: Momentum[i] = Close[i] − Close[i − Look_Back]. Default Value: Look_Back = 11; Index: i ~ Current Bar. | Look_Back = [5, 200], Step = 5; |
| Setup: | Long Setup: Yesterday’s Momentum is greater than the Momentum of two days ago: i.e. Momentum[i − 1] > Momentum[i − 2]. Index: i ~ Current Bar. | |
| Filter: | Long Filter: Today’s Opening price is greater than the average of yesterday’s High, Low, and Close: i.e. Open[i] > (High[i − 1] + Low[i − 1] + Close[i − 1]) / 3. Index: i ~ Current Bar. | |
| Entry: | Long Entry: Once there is a valid Setup/Filter, place an order to enter on stop if the market reaches a point equal to yesterday’s True Range added to yesterday’s Close: EntryLevel[i] = Close[i − 1] + True_Range[i − 1], where: True_Range[i − 1] = max(Close[i − 2], High[i − 1]) − min(Close[i − 2], Low[i − 1]). | |
| Exit: | Time Exit: Exit on the Nth profitable Open; Default Value: N = 1. 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 Stop: A sell stop is placed at [Entry − ATR(ATR_Length) * ATR_Stop]. | N = [1, 40], Step = 1; ATR_Length = 20; ATR_Stop = 6; |
| Sensitivity Test: | Look_Back = [5, 200], Step = 5 N = [1, 40], Step = 1 | |
| Position Sizing: | Initial_Capital = $1,000,000 Fixed_Fractional = 1% Portfolio = 5 Equity Futures (DJ, MD, NK, NQ, SP) ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20 | |
| Data: | Five equity futures markets (DJ, MD, NK, NQ, SP); 36 years (1980/01/01−2016/01/31) |
Table 1 | Specification: Trading Strategy.
III. Sensitivity Test with Commission & Slippage
Tested Variables: Look_Back & N (Definitions: Table 1):
Figure 2 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $50 Round Turn).
IV. Rating: Long Equity Trading System | Trading Strategy
A/B/C/D
V. Summary
(i) Long Equity Trading System underperforms alternative momentum models; (ii) The longer holding period defined by the variable “N” is preferred (Figure 1-2); (iii) The strategy can be profitable for +80% trades (when N = 1) but the overall performance is disappointing.
Related Entries: 3-Bar Momentum Pattern (Filter & Exit) | Hikkake Pattern (Filter & Exit)
Related Topics: (Public) Trading Strategies
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/babcock/longEquity