The Strategic Trader
Detailed Strategy Evaluation

Trading

Back in the saddle

I have been away from trading for a while now. Too long really. With two young kids and a new business, its been difficult to keep up with investing. However,I can not lose sight of my long term financial goals. Going forward this blog will document my success and failures as I work towards reaching $1 million dollars in liquid assets.

In addition to documenting my trades, I will continue to provide insights into various trading strategies. I am a firm believer that technical analysis can produce an edge. However, this is only one part of the equation. Figuring out how to apply a “small” edge and profit from it is the difficult part. This is an area I have really focused on recently and look forward to putting into practice.

Trading Methods Using Aroon Oscillator

The Aroon Oscillator is commonly used as a trend following indicator. Meaning buy when trending up, sale when trending down. In this article we will look at the following strategies for trading the Aroon Oscillator:

  1. Buy when aroon oscillator crosses above 0
  2. Buy when aroon oscillator crosses above some value x
  3. Buy when aroon oscillator crosses below 0
  4. Buy when aroon oscillator crosses below some value x

Strategy #1: Buy when aroon oscillator crosses above 0

Almost all parameters result in negative expectancy

Strategy #2: Buy when aroon crosses above some value x

This strategy performs fairly well, as long as x is < 0.  No parameter combination was able to exceed our target thresholds. However, a few came pretty close. The closest one would be AroonOscillator(40) crosses above -99

aroon oscillator strategy 1

 

Strategy #3: Buy when aroon oscillator crosses below 0

Performs better than when crossing above 0, but is not enough of an edge to use in a strategy.

Strategy #4: Buy when aroon oscillator crosses below x

There were several parameter combinations that exceeded both profit and winning % after 5 bars. The best combination was when aroonoscillator(8) crossed below -80

aroon oscillator strategy 2

 

Summary:

Using the aroon oscillator to trade “with the trend”, does not look like a viable strategy. However, buying when aroon oscillator crosses below certain values can yield a small edge. May be useful in filtering out bad trades as we start to build out a strategy.

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5 Minute Testing Procedure (Short Only)

We have already established a baseline for Long trades. Now we need to do the same thing on the short side. When comparing methods, some may behave differently when shorting than when going long.  The target will be any method that can predict market direction (5) standard deviations above the baseline average. We will establish baselines for both percent profitable and expected return per contract.

To establish a baseline we will run 100 random entry simulations against the target market. Because we do not know ahead of time the target trading frequency, we have to perform this test several times using various random rules. We will target 15,000 trades, 5,000 trades, 1,500 trades, and 500 trades over the sample period.  The simulations aim to predict the market direction 3, and 5 bars into the future.  We will be using a target market of ES Futures.

The strategies will not enter trades after 2:05  PM or before 8:30 AM. This ensures all exits are at the appropriate number of bars.

Baseline Results for 3 Bars into the future targeting 15,000 trades:

Percent Profitable: 53.96%
Expected Return:  +$5,345
Target Percent: 55.88%
Target Return: +$68,377

Baseline Results for 5 Bars into the future targeting 15,000 trades:

Percent Profitable: 52.54%
Expected Return:  +$8,939
Target Percent: 54.12%
Target Return: +$70,660

Baseline Results for 3 Bars into the future targeting 5,000 trades:

Percent Profitable: 53.85%
Expected Return:  +$380
Target Percent: 57.07%
Target Return: +$32,217

Baseline Results for 5 Bars into the future targeting 5,000 trades:

Percent Profitable: 52.67%
Expected Return: +$2,403
Target Percent: 55.97%
Target Return: +$44,050

Baseline Results for 3 Bars into the future targeting 1,500 trades:

Percent Profitable: 54.01%
Expected Return:  +3,32
Target Percent: 60.17%
Target Return: +$19,144

Baseline Results for 5 Bars into the future targeting 1,500 trades:

Percent Profitable: 52.65%
Expected Return:  +1,380
Target Percent: 58.98%
Target Return: +$25,199

Baseline Results for 3 Bars into the future targeting 500 trades:

Percent Profitable: 53.93%
Expected Return:  +$179
Target Percent: 64.24%
Target Return: +$9,766

Baseline Results for 5 Bars into the future targeting 500 trades:

Percent Profitable: 52.73%
Expected Return:  +$573
Target Percent: 63.92%
Target Return: +$16,306

These results show a different pattern than the long trades showed. When going long the expected return in most simulations were negative. The expected return on the short side is positive. Since all trades are for a pre-set number of bars, you could conclude from these results that the market moves down faster than it moves up.

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5-Minute Testing Procedures (Long Only)

Our initial focus is not to discover a profitable strategy. Instead, we aim to discover methods that can reliability tilt the odds in our favor.  The target will be any method that can predict market direction (5) standard deviations above the baseline average. We will establish baselines for both percent profitable and expected return per contract.

To establish a baseline we will run 100 random entry simulations against the target market. Because we do not know ahead of time the target trading frequency, we have to perform this test several times using various random rules. We will target 15,000 trades, 5,000 trades, 1,500 trades, and 500 trades over the sample period.  The simulations aim to predict the market direction 3, and 5 bars into the future.  We will be using a target market of ES Futures.

The strategies will not enter trades after 2:05  PM or before 8:30 AM. This ensures all exits are at the appropriate number of bars.

Baseline Results for 3 Bars into the future targeting 15,000 trades:

Percent Profitable: 54.21%
Expected Return:  -$4,048
Target Percent: 56.1%
Target Return: +$47,248

Baseline Results for 5 Bars into the future targeting 15,000 trades:

Percent Profitable: 53.27%
Expected Return:  -$6,435
Target Percent: 55.17%
Target Return: +$56,325

Baseline Results for 3 Bars into the future targeting 5,000 trades:

Percent Profitable: 54.18%
Expected Return:  -$2,009
Target Percent: 56.52%
Target Return: +$23,900

Baseline Results for 5 Bars into the future targeting 5,000 trades:

Percent Profitable: 53.31%
Expected Return:  -$2,900
Target Percent: 56.24%
Target Return: +$37,468

Baseline Results for 3 Bars into the future targeting 1,500 trades:

Percent Profitable: 54.32%
Expected Return:  -$455
Target Percent: 59.2%
Target Return: +$17,490

Baseline Results for 5 Bars into the future targeting 1,500 trades:

Percent Profitable: 53.35%
Expected Return:  -$1,080
Target Percent: 59.14%
Target Return: +$22,699

Baseline Results for 3 Bars into the future targeting 500 trades:

Percent Profitable: 53.91%
Expected Return:  -$367
Target Percent: 64.04%
Target Return: +$10,081

Baseline Results for 5 Bars into the future targeting 500 trades:

Percent Profitable: 53.30%
Expected Return:  -$173
Target Percent: 64.86%
Target Return: +$16,000

Based on these results, its evident that the sample period has a slight positive bias. Averaging around 54% profitable trades. However, the sample period has a negative profit expectancy of around -$.30 per trade. As you can see, the more trades we do the less variation and the lower threshold we need to cross to be considered “not random”. However, when targeting only 500 trades in the sample period a method will need to be nearly 65% profitable to rule out randomness.

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The Testing Environment

Our research can only be as accurate as the data used. To help ensure accuracy, all testing will be performed on data provided by e-signal. We are looking to thoroughly test indicators and strategies, not re-invent the wheel. Therefore, we will be using NinjaTrader 7 for all backtesting.

Most published results will be based on ES futures. However, to increase sample size we will also utilize a basket of DOW stocks for optimization and to also test how robust a method actually is. A method that works great on the ES, but fails miserably when tried on other stocks is generally the product of curve fitting.


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Finding an edge

If you want to be a successful trader, you need an edge… but how do we find one?  If your like most traders you start out by adding every indicator you can find to your chart. Before long your chart is nothing more than a squiggly mess, yet your still losing money. Next you jump on the “price action” bandwagon. Quickly you discover no two people can agree on what constitutes support and resistance.  A monkey can draw a line across a chart and show an example of where price “reacts” to this line. After a while, if your still around, you may eventually dabble with the mysterious art known as artificial intelligence. After creating hundreds of neural networks attempting to “predict” market direction you finally give up. Like so many others, your search ends in frustration and utter defeat. Feeling defeated the trader simply declares the market random.

I have personally gone through all of these stages. However, I do not believe the market is random. Instead, I believe its “mostly” random, with fleeting moments of clarity. Our goal is to take a long hard look at everything we “think” we know about the market. Thoroughly test  every indicator and method we can get our hands on to determine what really works.  All results will be posted for the public to see and provide feedback. Using this research, we can determine which methods provide an edge and which are simply a waste of time.


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