20dmf

[Pascal]

Pascal

I found your signals table from "The Effective Volume Investment Method". It appears to be different than your recent posting of May 24, 2011. I haven't tracked down if you have already explained this elsewhere. I am still looking.

Dave

Good find Dave! and Good question!

This is a pretty good question indeed!

There was an evolution between December and now: the IWM robot has been developed.
How did this affect the 20DMF method? In two ways:

1. When I developed the IWM robot and looked at the statistics, I noted that when the OB/OS indicator was extremely negative (below -90), we always experienced a reversal in the next days. This basically meant that pressing on a short in such conditions was not a good idea. I thus inserted that specific condition on the 20DMF: cover shorts when OB/OS reaches -90.
2. I then had a long thought about the "porosity" parameter that was set in the 20DMF. This parameter's intention is to avoid whipsaws when the indicator barely crosses a certain level and then reverses back. The porosity parameter says that the level must be crossed by a certain arbitrary level. The porosity parameter has a noble element though: it avoids the whipsaws effect in ill-timed trading decisions. This is positive when the 20DMF is used as a stand alone indicator. However, when it is used as an element of another indicator (such as the Robot), then the porosity parameter has a negative effect: it masks or delays to communicate the information that we have crosses some level. Since the 20DMF is handing the trade decision to the robot, I decided to limit the porosity parameter as much as possible and let the robot use the 20DMF together with his other indicators - and the associated statistic tables and the floor levels - to take trading decisions that were closer to the market.

The consequence is that indeed, the 20DMF as part of the robot produces more trades than the 20DMF when it was stand alone, and also produces lower returns (As a reference, the stand alone 20DMF generated 30 trades until Dec 15, 2001, for a total SPY return of 316%, while the actual 20DMF generated 36 trades during the same period, for a return of 291% as of January 28, 2011.

However, you can see below (first figure) the IWM returns using the multi time frame pivots and the stand alone 20DMF, compared to the Robot IWM return (second figure). The difference is very obvious.



Pascal

[dsmcdougal]

Pascal

Thanks for your in-depth explanation. So you have two systems: the original 20DMA and the new IWM Robot.

I will forward you tomorrow some Excel calculations I did for the two system signals on various ETFs.

Dave

[dsmcdougal]

Pascal

Here is a Mac Word 2004 document that describes my calculations in detail.

Executive summary: The 20DMF shows about a 10% higher CAGR than the IWM Robot over the 7/24/2007 to 12/2/2010 time period.

I have also attached two spreadsheets that show the actual calculations and charts of the two systems. I hope you can open and read them.

Executive summary: The two charts are worth 2000 words.

Dave

[Pascal]

Pascal

Here is a Mac Word 2004 document that describes my calculations in detail.

Executive summary: The 20DMF shows about a 10% higher CAGR than the IWM Robot over the 7/24/2007 to 12/2/2010 time period.

I have also attached two spreadsheets that show the actual calculations and charts of the two systems. I hope you can open and read them.

Executive summary: The two charts are worth 2000 words.

Dave

Thanks for this work Dave.
One major difference between the 20DMF and the Robots is that the 20DMF is mainly a trend following indicator, while the Robot will switch from trend following to mean-reversal depending on the combination of its LT/ST signals. Hence, in a strong trending market, the 20DMF should perform better as it wants to stay in the trade, while the IWM robot might leave the trade at some point and then be forced back in. However, in a choppy market with many "cover your shorts" signals, the 20DMF would stay in cash, while the Robot will try to get the best out of its short term signals


Pascal

[dsmcdougal]

Thanks for your explanation. Makes sense (and profit).

Dave

[asomani]

Thanks for this work Dave.
One major difference between the 20DMF and the Robots is that the 20DMF is mainly a trend following indicator, while the Robot will switch from trend following to mean-reversal depending on the combination of its LT/ST signals. Hence, in a strong trending market, the 20DMF should perform better as it wants to stay in the trade, while the IWM robot might leave the trade at some point and then be forced back in. However, in a choppy market with many "cover your shorts" signals, the 20DMF would stay in cash, while the Robot will try to get the best out of its short term signals


Pascal

Thanks Pascal.

It is in trend-following mode about 60% of the time and mean reversion mode about 40% of the time, based on the history available, is that correct?

[asomani]

Thanks Pascal.

It is in trend-following mode about 60% of the time and mean reversion mode about 40% of the time, based on the history available, is that correct?

Reminder to Pascal. Thanks.

[senco]

I would like to use the 20DMF signal for partially hedging (with IWM or TF futures) a portfolio of long traded stocks. My underlying assumption is that my long trades produce excess return, thus a trend following index hedging will improve risk adjusted returns; and that the 20DMF is better in identifying trend than 'simple' price moving-average or breadth based trend indicators. It seemed more appropriate than the robot signal as I want trend identification and not trade decisions; also it has less frequent signal.

Pascal - any feedback on this application? Do I miss something important?


Also:

Since the 20DMF is handing the trade decision to the robot, I decided to limit the porosity parameter as much as possible

If I do use the 20DMF signal for hedging it is standalone. Would it be advisable, and practical for me as a website user, to add the hysteresis (porosity) on my own?

A related comment: Would it be possible to add to the 'zoomed' 20DMF chart (and inverse ETFs graphs) the actual indicator reading, and the moving average value? When the signal is close to zero or MA level in the chart published before close it might be difficult to eyeball whether we have a transition or not.

[Pascal]

I would like to use the 20DMF signal for partially hedging (with IWM or TF futures) a portfolio of long traded stocks. My underlying assumption is that my long trades produce excess return, thus a trend following index hedging will improve risk adjusted returns; and that the 20DMF is better in identifying trend than 'simple' price moving-average or breadth based trend indicators. It seemed more appropriate than the robot signal as I want trend identification and not trade decisions; also it has less frequent signal.

Pascal - any feedback on this application? Do I miss something important?


Also:


If I do use the 20DMF signal for hedging it is standalone. Would it be advisable, and practical for me as a website user, to add the hysteresis (porosity) on my own?

A related comment: Would it be possible to add to the 'zoomed' 20DMF chart (and inverse ETFs graphs) the actual indicator reading, and the moving average value? When the signal is close to zero or MA level in the chart published before close it might be difficult to eyeball whether we have a transition or not.

Sure. I'll see if I can add these figures.
As a trend following tool, the 20DMF is better than the robot. However, it obviously does not work so well when there is no trend.


Pascal