TradersEdgeSystems.com

Consulting | Custom Trading Systems
Built-In Indicators | Custom Indicators

March 2006 Stocks and Commodities Traders Tips

Trading Trends with Bollinger Bands Z-Test (BBZ) System

Original article by Jacinta Chan
AIQ Code by Richard Denning

Since the AIQ program is particularly well suited to test a trading system on a portfolio of stocks, I decided to devise a system that would trade the NASDAQ 100 list of stocks. I used the period 9/1/2000 to 1/6/2006 as the in-sample period to adjust the parameters. This period includes bear, bull and sideways market periods.

In contrast to futures trading systems, trend following stock trading systems that work well are rather difficult to construct due to the fact that individual stocks do not tend to trend as much as futures and are more volatile. Generally a trend following system will require market timing filters to avoid large drawdowns. In running a few tests, I found that 40 days and 0.9 standard deviations were among the better parameter sets for the in-sample period.

The results of the in-sample test when both the long and short side were included were less than satisfactory without market timing filters. The long side worked during the bullish periods but the short side did not. Conversely, the short side worked during the bearish periods but the long side did not.

I then added some trend following market timing filters using the NDX Index. The filters tend to prevent the system from taking short positions on individual stocks when the NDX is trending upward and prevent the system from taking long positions when the NDX is trending downward.

FIGURE 1 (click here to view): Bollinger Bands Z System with timing filters added; Figure 1 is the equity curve for the combined long and short BBZ system with market timing filters trading the NASDAQ 100 stocks, compared to the NASDAQ 100 index.

Once the market timing filters were added, the system performance drastically improved. I also ran out-of-sample tests for the two systems during the period 9/1/1995 to 9/1/2000. The results of the in-sample and out-of-sample tests are summarized in Table 1:

Table 1:

No Market Timing
With Market Timing
In Sample:
Out of Sample:
In Sample:
Out of Sample:
       
Annualized IRR
(62.67)
(16.22)
21.17
21.54
Maximum Drawdown
(71.01)
(100.00)
(30.60)
(37.85)
Sharpe Rato
(0.39)
na
0.84
0.47

EDS Code for Trading Trends with Bollinger Band Z-Test System:
BBZ Sys1.EDS

Other BBZ Equity Curve Tests:

BBZ WITH market timing filters 95-00 (click here to view)
BBZ WITH market timing filters 00-06 (click here to view)

BBZ WITHOUT market timing filters 95-00 (click here to view)
BBZ WITHOUT market timing filters 00-06 (click here to view)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer | Privacy Policy | Contact Us | Spam Blocker | ©2009 Traders Edge Systems