An ADX Burst Trend-Seeking System - раздел Литература, Beyond Technical Analysis We Have Assumed That The Market Was About To Trend In Both The 65Sma-3Cc And ...
We have assumed that the market was about to trend in both the 65sma-3cc and the CB-PB systems, although we did not actually verify that the market was trending because it is difficult to measure trendiness consistently. As was shown in the discussion in chapter 3 on the range action verification index, market momentum is often a good measure of trendiness. Unfortunately, a certain amount of smoothing is essential to minimize noise in the indicator, and this smoothing usually causes undesirable lags in indicator response.
Figure 4.23 shows the March 1993 U.S. T-bond contract trending upward nicely from December 1992 through March 1993. The indicator under the daily bars is the 18-day average directional index. ADX measures the amount of activity outside the previous bar over a given period; a strong trend usually leads to a rising ADX line. An ADX reading above 20 is considered to indicate a trend, but the ADX is a lagging indicator, and there is little significance to any particular indicator value.
ADX is closely related to double-smoothed absolute momentum, and hence will often have quirky lags. The ADX will often seem to be late in signaling a trend, and choppy markets will not follow through in the original direction that caused the ADX to rise. In fact, the market can reverse strongly, and the ADX will keep on rising.
During a strong trend, as markets make big daily moves in the direction of the trend, the daily ADX momentum can "pop" over 1.0
112 Developing New Trading Systems
112*16
,.t
106*08
-103*04
Dec 93 Feb Mar
Figure 4.23 A rising 18-day ADX can be a good indicator of a trending market.
point, an ADX "burst." Figure 4.24 shows the March 1993 U.S. bond contract with the histogram of the ADX burst superimposed on the 18-day ADX line. As the trend accelerates, the daily ADX changes are more than 1, and you can see relatively large bars associated with this ADX
112*16
/
109*12
-106*08
-103*04
Figure 4.24 The histogram of ADX burst momentum shows daily changes greater than 1.
An ADX Burst Trend-Seeking System113
burst activity. Now you can build a trading system using this idea as shown in Figure 4.25, where the entries are circled.
Obviously, the ADX burst indicates accelerating momentum. So, here the design philosophy has changed to begin with a check that increases the odds of success of a trend-following strategy. Notice that the ADX burst is itself triggering the trade, and that the ADX is not acting as a filter. For reference, you can look up a similar system in Lucas and Le Beau (see bibliography for reference). Our goal is to take the trade in the direction of the short-term trend. If the 3-day SMA is greater than the 12-day SMA, then the trend is up, and vice versa. Table 4.12 shows the results using a simple 20-day exit strategy and allowing $100 for slippage and commissions, over all available data from Janury 1, 1975, through July 10, 1995.
The rather large profit factor suggests that the entries are effective in identifying profitable trades, so that an ADX burst is a good entry into strong trends. The profit factor is overestimated here to some degree because we are using continuous contract data. The results can be improved with multiple contracts, and you can try a variety of other exit strategies.
If you compare the number of trades here to that for the 65sma-3cc system, you will find that you have fewer entries, suggesting that the ADX burst is working as both a trade filter and a trigger. For example,
Figure 4.25 A trading system triggered by ADX burst with daily momentum changes more than 1.
114 Developing New Trading Systems Table 4.12 ADX burst system performance with $5,000 initial stop
| Market
| Profit ($)
| Winning Trades; Total Trades; Winning Percentage
| Profit Factor (Gross Profit; Cross Loss)
| Average Trade (S)
| Maximum Intraday Drawdown ($)
|
| British pound
| 40,531
| 34;75;45
| 1.39
|
| -25,113
|
| Canadian dollar
| 6,830
| 20;56;36
| 1.28
|
| -7,060
|
| Coffee
| 137,014
| 29;75;39
| 3.86
|
| -21,225
|
| Copper, high-
| 4,770
| 15;25;60
| 1.29
|
| -5,970
|
| grade
|
|
|
|
|
|
| Corn
| 22,269
| 37;70;53
| 2.58
|
| -3,356
|
| Cotton
| 72,770
| 32;64;50
| 3.49
| 1,138
| -4,860
|
| Crude oil
| 10,590
| 21;54;38
| 1.44
|
| -13,400
|
| Deutsche mark
| 63,300
| 40;73;55
| 3.49
|
| -8,675
|
| Gold
| 4,770
| 31;84;37
| 1.04
|
| -27,450
|
| Heating oil
| 52,469
| 30;56;54
| 2.61
|
| -7,850
|
| Japanese yen
| 63,450
| 37;69;54
| 2.35
|
| -18,050
|
| Live hogs
| 20,080
| 36;75;48
| 1.65
|
| -6,140
|
| Orange juice
| 25,013
| 29;80;36
| 1.63
|
| -12,692
|
| Soybeans
| 38,606
| 31;73;42
| 1.81
|
| -10,713
|
| S&P-500
| -28,650
| 20;55;36
| 0.79
| -520
| -65,815
|
| Swiss franc
| 76,238
| 35;68;51
| 2.75
| 1,121
| -8,075
|
| U.S. bond
| 54,531
| 27;60;45
| 2.56
|
| -11,306
|
this system was in the market about 35 to 45 percent of the time, indicating it has a rather large "neutral zone." A trading system with a neutral zone is out of the market unless it rises above stiff entry barriers. The 65sma-3cc system is always in the market, and is a reversal-type system, whereas the ADX burst system steps aside 55 to 65 percent of the time.
We used a wide initial stop of $5,000 in these calculations to isolate the performance of the system. Table 4.13 includes performance data on selected markets with an initial stop of $1,500. The performance with the two different initial stops was generally similar.
One of the quirks of the ADX burst system is that it will often get in late, near the tops or bottoms of short but swift moves (see Figure 4.26). Such moves fire its entry signals, but the capricious market fails to follow through with a trend in the advertised direction. Hence, you
An ADX Burst Trend-Seeking System115 Table 4.13 ADX burst system performance with a $1,500 initial stop
|
|
|
|
|
| Maximum
|
|
| Market
| Profit (S)
| Number of Trades
| Percentage of Wins
| Average Trade (S)
| Intraday Drawdown (S)
| Profit Factor
|
| British pound Coffee
| 64,438 148,584
| 82 85
| 39 33
| 744 1,749
| -18,719 -13,851
| 1.82 3.07
|
| Cotton
| 66,800
|
|
| 1,012
| -6,015
| 2.95
|
| Crude oil
| 6,070
|
|
|
| -13,440
| 1.24
|
| Deutsche mark
| 62,088
|
|
|
| -8,457
| 3.34
|
| S&P-500
| 19,160
|
|
|
| -33,675
| 1.24
|
| Swiss franc
| 61,575
|
|
|
| -9,125
| 2.88
|
| U.S. bond
| 40,556
|
|
|
| -12,944
| 1.74
|
should always trade a system such as this one with a preplaced stop loss order.
In summary, the ADX burst system provides entries into strong trends. It tests well across many markets and over long time periods. The system has a large neutral zone, so it is in the market only 3 5 to 45 percent of the time. It differs from the 65sma-3cc system, which is
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Figure 4.26 The June 1990 U.S. bond contract sells off beyond a trading range to make a new low with good momentum. The system kicks in with a short. The bond market soon reverses, to get back into the prior consolidation region.
116 Developing New Trading Systems
always in the market, and does not have a trend filter. You can use it to enter trades or increase the position in those markets. You can derive other variations using different values of the ADX burst, the look-back period for the burst calculations, and other exit strategies.
Все темы данного раздела:
Developing New Trading Systems 73
Introduction 73 The Assumptions behind Trend-Following Systems 74
The 65sma-3cc Trend-Following System 75 Effect of Initial Money Management Stop 88 Adding Filter to the 65sma-3cc Syste
Selected Bibliography 253 Index 255 About the Disk 261
Preface
This is a book about designing, testing, and implementing trading systems for the futures and equities markets. The book begins by developing trading systems and ends by def
Introduction
Хорошая система торговли удовлетворяет вашу индивидуальность. К счастью, самый быстрый способ находить каждый - через процесс испытания(суда) и ужаса(террора). Любое проверяющее система программное
РАЗВИТИЕ И ВНЕДРЕНИЕ ТОРГОВЫХ СИСТЕМ
На предмете. Привлекательная особенность - то большинство материала, первоначальное или новое. Эта книга разделена на две половины по четыре главы каждая. Первая часть посвящена проектированию торг
The Usual Disclaimer
Throughout the book, a number of trading systems are explored as examples of the art of designing and testing trading systems. This is not a recommendation that you trade these systems. I do not c
What Is a Trading System?
A trading system is a set of rules that defines conditions required to initiate and exit a trade. Usually, most trading systems have many parts, such as entry, exit, risk control, and money manage
Comparison: Discretionary versus Mechanical System Trader
Table 1.1 compares two extremes in trading: a discretionary trader and a 100% mechanical system trader. Discretionary traders use all inputs that seem relevant to the trade: fundamental data, techn
Discretionary Trader 100% Mechanical System Trader
Subjective
Objective
Many rules
Few rules
Emotional
Unemotional
Varies
Why Should You Use a Trading System?
The most important reason to use a trading system is to gain a "statistical edge." This often-used term simply means that you have tested the system, and the profit of the average trade—
Robust Trading Systems: TOPS COLA
A robust trading system is one that can withstand a variety of market conditions across many markets and time frames. A robust system is not overly sensitive to the actual values of the parameters
How Do You Implement a Trading System?
Begin with a trading system you trust. After sufficient testing, you can determine the risk control strategy necessary for that system. The risk control strategy specifies the number of contracts p
Who Wins? Who Loses?
Tewles, Harlow, and Stone (1974) report a study by Blair Stewart of the complete trading accounts of 8,922 customers in the 1930s. That may seem like a long time ago, but the human psychology of fe
Beyond Technical Analysis
The usual advice for technical traders is a collection of rules with many exceptions and exceptions to the exceptions. The trading rules are difficult to test and the observations are hard to quan
Introduction
This chapter presents some basic principles of system design. "You should try to understand these issues and adapt them to your preferences.
First, assess your trading beliefs—these b
What Are Your Trading Beliefs?
You can trade only what you believe; therefore, your beliefs about price action must be at the core of your trading system. This will allow the trading system to reflect your personality, and you a
Six Cardinal Rules
Once you identify your strongly held trading beliefs, you can switch to the task of building a trading system around those beliefs. The six rules listed below are important considerations in tradin
Rule 1: Positive Expectation
A trading system that has a positive expectation is likely to be profitable in the future. The expectation here refers to the dollar profit of the average trade, including all available winning an
Rule 2: A Small Number of Rules
This book deals with deterministic trading systems using a small number of rules or variables. These trading systems are similar to systems people have developed for tasks such as controlling a che
Days since 08/01/95
Figure 2.2 SScP-500 closing data with regression using terms raised to the fifth power.
(2.1)
(2.2)
Est Close = C0
More rules need more data
2 4 8 12 16 24 32 48 64 96 128 Number of rules
Rule 3: Robust Trading Rules
Robust trading rules can handle a variety of market conditions. The performance of such systems is not sensitive to small changes in parameter values. Usually, these rules are profitable over mult
Number of rules
Figure 2.5 Adding more rules delayed entries and exits, increasing maximum intraday drawdown. Note that the horizontal scale is not linear.
today's high + 1 point on a buy
Number of rules
Figure 2.6 Increasing the number of rules decreased profits in the U.S. bond market from January 1, 1975 through June 30, 1995. Note that the horizontal scale is not linear.
Delay (» of days) after crossover
Figure 2.7 The effect on profits of changing the number of days of delay in accepting a crossover signal of a 3-day SMA by 12-day SMA system is highly dependent on the delay.
Here must be a Figure.
Figure 2.8 The August 1995 crude oil contract with curve-fitted system
profitable trades. As many as 87 percent of all trades (20 out of 23) were profitable. A second clue
Rule 4: Trading Multiple Contracts
Multiple contracts allow you to make larger profits when you are right. However, the drawdowns are larger if you are wrong. You are betting that with good risk control, the overall profits w
Rule 5: Risk Control, Money Management, and Portfolio Design
All traders have accounts of finite size as well as written or unwritten guidelines for expected performance over the immediate future. These performance guidelines have a great influence over the
Equity Curve: 3SF vs SF+TY+CT
-3SF
-SUM
Time (months)
Figure 2.11 This contrived jagged equity curve has a standard error of 2.25. The perfectly smooth equity curve has an SE of zero. The standard deviation of monthly returns is 33 pe
Rule 6: Fully Mechanical System
The simplest answer to why a system must be mechanical is that you cannot test a discretionary system over historical data. It is impossible to
Summary37
for
Summary
This chapter developed a checklist for narrowing your trading beliefs. You should narrow your beliefs down to five or less to build effective trading systems around them.
This chapter also
Introduction
This chapter examines many key system design issues. Now that you understand some basic principles of system design, you can consider more complex issues. And as you understand these issues, you c
Diagnosing Market Trends
You can design a profitable trading strategy if you can correctly and consistently diagnose whether a market is trending. In simple terms, the market exists in two states: trending and ranging. A
ADX Rising, RAVI Rising, Market (1/1/89-6/30/95) ADX>20 RAVI > 3
Coffee
30.2
43.3
Copper, high-grade
27.0
35.3
Cotton
29.2
To Follow the Trend or Not?
If you are not a large hedger or an institutional trader, you can follow either of two basic strategies when you design a trading system. You can be a trend follower, or you can take antitre
Profits of age of Winner Loser tive Drawdown
($) Trades Winners ($) ($) Losers ($)
Coffee
1,837
27,065
-11,215
To Optimize or Not to Optimize?
If you have a computer, you can easily set up a search to find the "optimum" values for a system over historical data. The results can be truly astonishing. Imagine your profits if you c
Length of Optimized 3 mo. 1990 6 mo. 1990 9 mo. 1990 12mo.1990 SMA Relative Relative Relative Relative Relative (days) Rank Rank Rank Rank Rank
Initial Stop: Solution or Problem?
Many traders have raised stop placement to an art form because it is not clear if the initial stop is a solution or a problem. The answer depends on your experiences. Often, the stop acts as a magn
Day CHBOC with varying initial stop
S
Changes In MIDD for 20-day CHBOC on Coffee
-20000
-22000
S
-24000
-26000
-28000
-30000
-32000
-34000
-36000
Changes In percent profitable trades, 20-day CHBOC on Coffee
>o o 10 o irt o io o io
t- r- cm cm co ro ^t -a-
Initial stop ($)
Cumulative frequency distribution average 10-day daily range in coffee
250 750 1250 1750 2250 2750 3250 3750 4250 4750 5250 Range ($)
Does Your Design Control Risks?
As you design your trading system, remind yourself that one of your key goals is to control the downside risk. You will quickly discover that risk is a many-splendored thing. This section br
Data! Handle with Care!
You have many choices when you select data for your system testing. You should therefore exercise great care in choosing your test data because they have a big influence on test results.
C
Profit MIDD of Wins Win/Loss Data Type ($) ($) Trades (%) Ratio
Actual with rollovers 17,963 -21,663 111 40 1.80
Continuous type 38/13 18,450 -24,813 79 31 2.74
Continuous type 49/25 20,413 -22,137 77 31 2.89
Continuous type 55/25 20,
Choosing Orders for Entries and Exits
You have three basic choices for orders that you use to initiate or exit your trades: market, stop, or limit orders. There are three philosophies at work here. One says to get your price, implying
Understanding Summary of Test Results
This discussion of the detailed summary of test results found in technical analysis programs uses in part the report from Omega Research's TradeStation™ software. The purpose of the summary is to s
British Pound 38/13-dally 02/13/75 - 7/10/95 Performance Summary: All Trades
Total net profit ($) 155,675.00
Gross profit ($) 266,918.75
Total number of trades 71
Number of winning trades 32
Largest winning trade
What the Performance Summary Does Not Show
The test summary leaves out some important information, highlighted below. You may wish to examine these factors in greater detail.
One simple ratio is the recovery factor (RF). RF is abso
A Reality Check
This section sounds a note of warning before you proceed: Test results are not what they seem. You should recognize that trading systems are designed with the benefit of hindsight. This is true bec
Introduction
A trading system is only as good as your market intuition. You can formulate and test virtually any trading system you can imagine with today's software. The previous chapters studied the b
The Assumptions behind Trend-Following Systems
The basic assumptions behind a simple trend-following system are as follows:
1. Markets trend smoothly up and down, and trends last a long time.
2. A close beyond a moving average
The 65sma-3cc Trend-Following System
This section discusses how to formulate and test a simple, nonoptimized, trend-following system that makes as few assumptions as possible about price action. It arbitrarily uses a 65-day simple mov
Distribution of Trade P&L for 65sma-3cc: 2400 trades
tOU
Comparing frequency distribution of 65sma-3cc trades to standard normal distribution
| 0.2
Frequency distribution of 65sma-3cc trades compared to a modified normal distribution
^-•-•^-T-OOOOOOOOOOOOOT-'-
Z (standard deviations)
Maximum favorable excursion of 1,565 losing trades of 65sma-3cc system
800 700 600 500 400 300 200 100 0
s
Maximum profit ($)
Figure 4.9 A histogram of maximum profit in 1,565 losing trades over 20 ye
Cumulative Frequency of winning trades, 65sma-3cc system
2000 3000 Maximum pro
Effect of Initial Money Management Stop
Since the initial test of the 65sma-3cc model was encouraging, we can now do more testing. The first item of business is to insert an initial money management stop into this model. Our detailed ana
Number of trades Increases and levels off.
•US Bond
-DM
750 1000 125
Volatility-based initial money management stop
Figure 4.13 The profits (upper line) increase as the initial money management stop is loosened. Eventually, the stop is too wide and profits begin to level off. The lower line is t
Profit and MIDD for LH as a function of initial MMS
Volatility-based initial MMS
Figure 4.14 The profits (upper line) increase as the initial money management stop is loosened. The lower line is the maximum intraday drawdown. Data are for the live hogs market.
Adding Filter to the 65sma-3cc System
So far, we have let the trading system generate pure signals without trying to filter the signals in any way. As we have seen, this system will generate many short-lived or "false" sign
Largest losing trade increases as MMS Increases
-1000
-2000
-3000
<s.
Volatility based initial MMS for Sugar
Figure 4.15 Largest losing trade for sugar using the 65sma-3cc trading system increases as the volatility-based initial money management stop increases.
also the short exi
Adding Exit Rules to the 65sma-3cc System
Selecting general and powerful exit rules is a difficult challenge in system design because the markets exhibit many different price patterns. One form of exit that is particularly easy to impleme
Channel Breakout-Pull Back Pattern
This section discusses a trading system based on a pattern observed in mature markets, that is, markets with a large volume of institutional activity. In these markets, the big players have a tend
A Trend-Antitrend Trading System
In this section we explore the trend-antitrend (T-AT) system, designed to switch automatically between an antitrend mode and a trend-following mode. You will like this system if you aggressively l
Gold-Bond Intermarket System
This section develops intermarket trading systems for trading negatively or positively correlated markets. We begin with a quick review of the difficulties of formulating intermarket models. The go
A Pattern for Bottom-Fishing
Market-specific systems work best on a particular market because they capture some unusual feature of that market. It is difficult to speculate why certain markets show signature patterns. We shoul
Time: 4/82-7/95
Figure 4.39 Equity curve for bottom-fishing pattern (9/82-7/95) with X = 1 and /= 0 (aggressive trades) for SScP-500 data with rollovers. Initial money management stop was $2,000.
Identifying Extraordinary Opportunities
Once or twice a year, the futures markets provide extraordinary opportunities for exceptional profits, and if you can take advantage of these opportunities, your account performance will improve s
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