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June 2006 Stocks and Commodities Traders Tips

Harnessing the (Mis)Behavior of Markets / Brownian Model Strategy

Original article by Rick Martinelli
AIQ code by Richard Denning

In Figure 11 of his article, the author presents the results for a group of stocks that apply the trading system that is described in the article.

AIQ is very well suited for testing portfolios of stocks. Using the 26 stocks listed in Figure 11, I performed a variety of portfolio level tests. The tests disclosed by the author in Figure 11, represent in-sample optimizations on a stock-by-stock basis. The in-sample periods used by the author in Figure 11, mostly cover the year 2005. Consequently, I used 2005 as the in-sample test period. The author’s method of optimization causes each stock to use a different parameter for the alpha cutoff. Generally my preference is to use the same parameter to trade all stocks in the portfolio because separate parameters for each stock can lead to an overly optimized situation that will not perform well in out-of-sample tests.

I used AIQ’s EDS back-testing module to run an in-sample test (year 2005) and three out-of-sample tests, walking backwards one year at a time. The results of these tests are shown in Table 1. The in-sample performance is quite good with the average profit per trade of 0.51%, a reward to risk ratio of 1.96, and an annualized return on 198 trades of 137%.

I also ran years 2004, 2003 and 2002 separately using the same individually optimized parameters. For these years, the results are not consistent with the in-sample period indicating over optimization of parameters. I then optimized for the best single setting that showed some robustness and generated a reasonable number of trades per year (alpha cutoff = 1.25).

The results of this test are shown in Table 2. Although the in-sample period’s returns (Table 2) are less than that of the individually optimized returns (Table 1), the out of sample results are more consistent with the in-sample results and all of the out-of-sample results are better (Table 2) than the out-of-sample results of the first test (Table 1).

The results of these tests support my belief that the same parameter set should be used for all stocks in the portfolio.

 

EDS Code for MisBehavior of the Markets
HMBM Sys1.EDS

 

TABLE 1: [BACK TO TOP]

Description:
Long Trades:
Short Trades:
Combined:

In or out-of-sample
IN
IN
IN
Start date
01/04/05
01/04/05
01/04/05
End date
12/30/05
12/30/05
12/30/05
No of trades
125
73
198
Average % profit
0.54%
0.45%
0.51%
Average SPX % profit
0.06%
-0.01%
0.03%
Annual ROI
148%
119%
137%
Reward/Risk
2.06
1.80
1.96

In or out-of-sample
OUT
OUT
OUT
Start date
01/02/04
01/02/04
01/02/04
End date
12/31/04
12/31/04
12/31/04
No of trades
90
99
189
Average % profit
0.00%
0.31%
0.16%
Average SPX % profit
-0.04%
0.06%
0.01%
Annual ROI
-1.3%
1.6%
0.21%
Reward/Risk
0.99
1.56
1.29

In or out-of-sample
OUT
OUT
OUT
Start date
01/02/03
01/02/03
01/02/03
End date
12/31/03
12/31/03
12/31/03
No of trades
119
65
184
Average % profit
0.60%
-0.36%
0.26%
Average SPX % profit
0.11%
-0.20%
0.00%
Annual ROI
161%
-80%
76%
Reward/Risk
1.72
0.65
1.34

In or out-of-sample
OUT
OUT
OUT
Start date
01/02/02
01/02/02
01/02/02
End date
12/31/02
12/31/02
12/31/02
No of trades
78
100
178
Average % profit
-0.64%
-0.19%
-0.39%
Average SPX % profit
0.29%
-0.09%
0.08%
Annual ROI
-152%
-52%
-96%
Reward/Risk
0.57
0.87
0.74

 

TABLE 2: [BACK TO TOP]

Description:
Long Trades:
Short Trades:
Combined:

In or out-of-sample
IN
IN
IN
Start date
01/04/05
01/04/05
01/04/05
End date
12/30/05
12/30/05
12/30/05
No of trades
61
102
163
Average % profit
0.60%
0.32%
0.42%
Average SPX % profit
0.01%
0.05%
0.04%
Annual ROI
149%
83%
108%
Reward/Risk
1.98
1.58
1.73

In or out-of-sample
OUT
OUT
OUT
Start date
01/02/04
01/02/04
01/02/04
End date
12/31/04
12/31/04
12/31/04
No of trades
70
64
134
Average % profit
0.23%
0.42%
0.32%
Average SPX % profit
-0.13%
0.14%
0.00%
Annual ROI
63%
100%
81%
Reward/Risk
1.47
1.78
1.62

In or out-of-sample
OUT
OUT
OUT
Start date
01/02/03
01/02/03
01/02/03
End date
12/31/03
12/31/03
12/31/03
No of trades
95
46
141
Average % profit
0.85%
-0.10%
0.54%
Average SPX % profit
0.14%
-0.27%
0.01%
Annual ROI
228%
-21%
147%
Reward/Risk
2.03
0.88
1.65

In or out-of-sample
OUT
OUT
OUT
Start date
01/02/02
01/02/02
01/02/02
End date
12/31/02
12/31/02
12/31/02
No of trades
52
76
128
Average % profit
-0.34%
-0.15%
-0.23%
Average SPX % profit
0.08%
-0.20%
-0.09%
Annual ROI
-83%
-39%
-57%
Reward/Risk
0.73
0.90
0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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