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July 2006 Stocks and Commodities Traders Tips

The Wilson Relative Price Channel

Original article by Leon Wilson
AIQ Code by Richard Denning

Since AIQ is very well suited for back-testing portfolios of stocks, I devised two trading systems using the channel indicators. The author used the weekly mode in the example, so I decided to create a weekly trading system. All tests were run in the weekly mode. The first system labeled “LE” (see code below) uses only the WRP indicators:

Enter a long position on rule “LE” if:
The close crosses up from below the neutral lower band

Exit a long position on rule “LX” if:
1) The close crosses down from above the over bought band or
2) The close crosses down from above the upper neutral band or
3) The close is below the lower neutral band for two weeks in a row

I then tested this over a generally bullish period from 02/28/03 to 05/08/06 using the S&P 500 stocks combined with the NASDAQ 100 stocks. I used the author’s parameters and I did not attempt to do any optimization. The “LE” entry with “LX” exit system out performed the SPX over the same period. The results show an 18.3% average annual return with a maximum drawdown of 9.8% and a Sharpe ratio of 0.93.

Since this is a trend following system, I wanted to see if adding a trend filter would improve the results. I wanted to get in on potential new trends early so as to be able to follow the trend for a longer period of time. To do this I added an ADX filter that requires the 14-week ADX to have been below 15 within the past 10 weeks before the crossover signal. The entry rule “LE1” is the entry rule from “LE” above plus the ADX trend filter. The addition of the filter improved the results. The equity curve and summary metrics are shown in Figure 1. The average annual return increased to 20.3% with a maximum drawdown of 8.9% and a Sharpe ratio of 1.31. The ADX filter improved the results and the WRPC indicators appear to have merit for trend following systems.

Here are some sample test reaults for a weekly trend-following system using the WRPC indicators:
FIGURE 1 (click here to view).

EDS Code for Wilson Relative Price Channel
WRP Channel.EDS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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