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Evaluation of Technical Trading methods

Upon examination and extensive testing of some technical trading methods, it appears that most methods suffer from a large percentage of false positives. The easy way to sort though this mess is to show a P & L (Profit & Loss) curve along with an OHLC price chart with Long, Short, and Cover symbols.

Click on charts with blue boarders for a larger image.

USO-MAvg

From EODTT: This chart shows a profit of $634.00 for the in sample segment of the chart where we picked the three parameters with the benefit of hindsight. In the next segment using the same parameters results in a loss of $835.00. Not very impressive, and unfortunately typical. The out of sample performance is fairly random.

Chart generation sequence. Run End of Day Technical Trader (EODTT) software, select market price data file (USO.txt) Any daily market data file downloaded from yahoo.com will do. Select the Study (MovAvg), select % in Sample (70%). Note, above  plot total P & L (TPL) has been selected.

EODTT calculates the end of the in sample period profit for many combinations of the three moving averages, short moving average (SMA), medium moving average (MMA), and long moving average (LMA) and makes note of the parameters generating the highest profit.

A long signal is generated when SMA>MMA>LMA, a short signal is generated when SMA<MMA<LMA. The are also three modes (reverse, long, short) for the MovAvg study. This chart had been run in the "reverse" mode.

In reverse mode, we are always in the market and we reverse our position when a signal occurs. In long mode we only go long on a long signal and we cover on a short signal. In short mode, vice versa.

So far I have mostly implemented the following technical trading studies,  Mono, Fisher, FishConfirm, MovAvg, ADX, Week_Segements, Regression, and MaxProfitH.

EWaveTrade is a tool to aid in the process of analyzing market price data using the Elliot Wave Theory, particularly applying the concepts and principles developed by Glenn Neely. It is claimed that the book "Mastering Elliott Wave" by Glen Neely is recommended for both potential developers and users of this software."

I started out by downloading, compiling and testing  the EWaveTrade software Version 1.0. It worked nicely with the sample data files provided. When I tried to use some more modern daily market data downloaded from Yahoo there were some minor data conversion errors which were easy to fix with some minor changes to the software.

From reading "Mastering Elliott Wave" by Glen Neely I gained a slightly better understanding of reading the charts generated by the EWaveTrade software.

Elliot Wave Chart

From EWaveTrade: Monowaves are denoted by the orange diamond symbols and use hindsight of one market day.

Monowaves are defined as the beginning and end of a continuous trend where in the long case each close is higher than the previous and in the short case vice versa. Please note that the end of a monowave cannot be determined until one market day after the end of a continuous trend.

Most of the time the five Elliott waves in red and blue simply connect each of the monowaves. However, in the case above EWaves m-1 and m0, we see that two monowaves are skipped above giving the illusion that EWaves show the larger trend turning points. Unfortunately, the skipping of the monowaves only occurs in EWaves m-1 and m0 never in EWave m3, and therefore too late to trade on. In other words the skipping is done with the benefit of hindsight.

To verify this behavior, I modified the EWaveTrade software such that it did not read in the entire market data at first and I added a button to read in one more day each time the button was pressed. Then I could see the five waves change each time another market day was added. The Elliott wave preformed no better than monowaves which themselves use hindsight of one market day.

I do admit my interpretation on how to profitably trade Elliott wave theory may be completely wrong.

 

USO Mono Zoom

From EODTT: Trading as soon as the monowaves are defined, which is one day after the trend changes.
Note for clarity, we zoomed into a section where the P&L and price curves are near.

Trading based on monowaves resulted in poor performance for our test set.

Our test set consisted of GLD, SLV, SPY, and USO using the data range 2008-6-16 to 2011-7-14. Furthermore, GLD, SLV, and USO were each split into three segments. Our test set was GLD1.txt, GLD2.txt, GLD3.txt, GLDAll.txt, SLV1.txt, SLV2.txt, SLV3.txt, SLVAll.txt, SPYAll.txt, USO1.txt, USO2.txt, USO3.txt, USOAll.txt. Note, above  plot closed P & L (CPL) has been selected.

SLV3 Fisher

From EODTT: The fisher indicator has a "Length" parameter like a moving average. The longer the length the fewer the trades. With hindsight we choose a profitable "Length", Using the "Length" for the next two market data segments results in less impressive performance. Closed P & L selected.

GLD Fisher Confirm

From EODTT: Fish Confirm is similar to the Fisher indicator, except that it requires two consecutive consistent trend change indicators before entering a trade. Closed P & L selected.

With hindsight for the "Length" we have good performance. Performance with Length 15 stays good for GLD2.txt with P & L of $2757. and for GLD1.txt of  ($504). and GLDAll.txt with $4400.

Fish Confirm also preformed well with SLV3 with hindsight we choose "Length" as 20. Giving results SLV3 P & L  $7714, SLV2 ($2636), SLV1 $8218 and SLVAll $15896.

USO3 with hindsight we choose "Length" as 4. P & L USO3 $4104, USO2 ($3577), USO1 ($154) USOAll $2323. Draw your own conclusions.

 

GLD ADX 5

From EODTT: ADX, computes +DI, -DI and ADX, we go long when ADX > 25 and +DI > -DI, we go short when ADX > 25 and +DI < -DI, we cover when ADX < 25. There is also a "Length" parameter. Total P & L selected.

With hindsight for the "Length" of 5 we have good performance for GLD3 with P & L of $2221. GLD2  ($1570)  GLD1  ($419) and GLDAll  $187.

SLV ADX

From EODTT: For ADX study P & L plot turned off and indicator plots appear. We zoom into a section where ADX drops below 25 and see that a cover is executed on March 13, 2009, Price 13.05, Cover 1 Fill, Position 0, which is displayed via mouse over "3/13/2009 , 13.05 C1F P0".

With hindsight for the "Length" of 4 we have good performance for SLV3 with P & L of $4470. SLV2  ($2568)  SLV1  $7198. and SLVAll  $11460.

Go on to Part 2    Buy End of Day Technical Trader (EODTT) software.

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