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April 2007 Stocks and Commodities Traders Tips


Two-Point Problem of the Rate of Change

Original article by Martti Luoma and Jussi Nikkinen
AIQ Code by Richard Denning

The AIQ code for the Martti Luoma and Jussi Nikkinen’s adjusted rate of change indicator is given below. The authors present a case for the adjusted rate of change indicator (ROCadj) as an improvement over the traditional two-point rate of change indicator (ROC). They make some excellent points but they do not attempt to use the indicator in a trading system to see if it will out perform the traditional indicator. I decided to give this a try by devising the following trading system:

Enter a long position if:

1) The 20 day ROC (or ROCadj) is positive today and yesterday it was negative

2) The 5 day linear regression slope of the 50 day simple moving average of the NASDAQ 100 index is greater than zero, indicating an uptrend

3) Use the ROC (or ROCadj) as a sorting indicator, descending, to select which signals to take each day

4) Put 20% of the capital allocated to the system into each trade, taking no more than 2 trades per day, and hold no more than 5 total positions at any one time.

Exit all long positions after 3 trading days.

I initially reversed the rules for the short sale tests, but after some tests the short side worked so poorly that I changed parameters and added a few more rules. However the short side still did not work over the test period.

To test the effectiveness of the ROCadj, I ran two tests for longs and two tests for the shorts using the AIQ Portfolio Simulator and the NASDAQ 100 list of stocks over the test period, 9/1/00 to 02/06/07. One test was run with the ROC indicator and the other was run with the ROCadj indicator. Figure 1, which compares the resulting equity curves of the two tests on the longs, shows that the traditional ROC indicator works better in the context of this trading system. Figure 2, which compares the resulting equity curves of the two tests on the shorts, shows that the traditional ROC indicator also works better in the context of this trading system. Both of the short side systems have negative returns over the test period.

Figure 1 (Click to here to view.)

Figure 2 (Click here to view.)

EDS Code for Adjusted Rate of Change Indicator:
RC 2pt.EDS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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