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April 2011 Stocks and Commodities Traders Tips


Identifying Cup Formations Early:

AIQ Version:

Original article by Giorgos E. Siligardos, PhD
AIQ Code by Richard Denning

The AIQ code for for Giorgos E. Siligardos’s article, “Identifying Cup Formations Early”, is shown below. I devised a trading system using 76 actively traded NASDAQ stocks to test the semi-cup formation as an entry technique. The trading rules for the system are as follows:

Using a daily time frame,
Enter a long position when:
1) A semi-cup formation is first detected
2) Enter the next bar at the open using a market order

Exit a long position when:
1) Using a trailing 25% exit or
2) Protect 100% of a 15% or greater profit
3) Exit the next bar at the open using a market order

Short positions were not tested.

In Figure 1, I show the test results of simulating trading the Russell 1000 stocks, using the following parameters:
1) Maximum positions per day = 3
2) Maximum total positions allowed = 10
3) Choose weakest candidates using 32 bar AIQ relative strength
4) Size each position at 10% of total account equity recomputed every day

For the test period of 1/3/2000 to 1/6/2011, the average annual return was 18.8% with a maximum drawdown of 68.8% on 11/20/08. Although the return is reasonably good, the maximum drawdown is larger than most could tolerate. With this in mind, I added a very simple market timing technique which added the following rules:

1) Longs can only be entered when the SP500 index is trading above its 200 day simple moving average for 2 or more consecutive days.
2) Exit all positions when the SP500 index falls below its 200 day simple moving average for 2 or more consecutive days.
For the test period of 1/3/2000 to 1/6/2011, the average annual return was 10.1% with a maximum drawdown of 25.6% on 7/17/09, see Figure 2. The drawdown was significantly reduced by the addition of the simple market timing technique. Although the average annual return was also reduced the Sharpe ratio increased from 0.47 to 0.75 indicating a less risky approach.

EDS Code for Identifying Cup Formations:
SemiCup.EDS
(right click and choose Save As)



Traders Studio Version :

Original article by Giorgos E. Siligardos, PhD
Traders Studio Code by Richard Denning

The TradersStudio code for Giorgos E. Siligardos’s article, “Identifying Cup Formations Early”, is shown below. I devised a trading system using 76 actively traded NASDAQ stocks to test the semi-cup formation as an entry technique. The trading rules for the system are as follows:

Using a daily time frame,
Enter a long position when:
1) A semi-cup formation is first detected
2) Enter the next bar at the open using a market order
Exit a long position when:
1) After holding for 10 bars

Short positions were not tested.

I used the EquitySizeEvenlyWithFilters trading plan to run a trading simulation. This trading plan ships with the TradersStudio software. I used the following parameters:
Session : parameter = 2, exitBars=10, startDte=0960102 (01/02/1996)
TradePlan: MaxPos=10,PerPeriod=80, FilerType=0,PerPeriod=80

In Figure 1, I show the resulting equity curve and in Figure 2, I show the resulting underwater equity curve. In Table 1, I show the year by year returns for the system. The total net profit for the period was $1,167,424 with a maximum drawdown of $918,313 (59.5% on 11/20/2008).

Captions:

Figure 1: Equity curve for the period 1/2/1996 to 2/4/2011 trading a portfolio of 76 actively traded NASDAQ stocks.

Figure 2: Underwater equity curve for the period 1/2/1996 to 2/4/2011 trading a portfolio of 76 actively traded NASDAQ stocks.

Table 1: Yearly returns trading a portfolio of 76 actively traded NASDAQ stocks, based on a starting capital of $250,000.

Traders Studio Code for Identifying Cup Formations:
SEMI_CUP.zip
(right click and choose Save As)

 

 

 

 

 

 

 

 

 

 

 

 

 

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