20dmf

[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?

[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

[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.

[Pascal]

I do not know and did not check that.
I trust that your evaluation is correct.


Pascal

[Billy]

I do not know and did not check that.
I trust that your evaluation is correct.


Pascal

I think there is some confusion here with the IWM robot performance.
60% of profits (not time!) came from LT "trend-following" trades and 40% from ST "mean-reversion" trades. But ST trades are usually active when the 20 DMF is neutral, so there is no clear correlation.
Billy

[asomani]

I think there is some confusion here with the IWM robot performance.
60% of profits (not time!) came from LT "trend-following" trades and 40% from ST "mean-reversion" trades. But ST trades are usually active when the 20 DMF is neutral, so there is no clear correlation.
Billy

Thanks for clearing that up, Billy.

So, regarding time, I guess it's a question of how often markets are trending vs. range-bound. Based on your experience and knowledge, what would you say this is? I've heard some say the market is trending 1/3 of the time and range-bound 2/3 of the time. Is this true?

Perhaps we have been spoiled in recent years (2008, 2009, 2010) with some very nice market trends.

[Billy]

Thanks for clearing that up, Billy.

So, regarding time, I guess it's a question of how often markets are trending vs. range-bound. Based on your experience and knowledge, what would you say this is? I've heard some say the market is trending 1/3 of the time and range-bound 2/3 of the time. Is this true?

Perhaps we have been spoiled in recent years (2008, 2009, 2010) with some very nice market trends.

Aly,
I've heard and read for years the same 2/3 and 1/3 proportion.
But it all really depends on the timeframe you're looking at. I know traders in this forum who deem a 1-hour trend an eternity and others who are only looking at monthly trends!
For the robot, ST is a 3-day horizon and LT is a 10-day horizon. It seems to be the best timeframe compromises for optimizing what we are trying to achieve: consistent compounded (very) long term risk-adjusted returns.
I suggest that you explore the Market Sci blog archives for their posts about research on mean-reversion and trend-following markets. They were big promoters of mean-reversion strategies until they discovered that for the last few years a shift clearly happened in favor of trend-following strategies. They explain why they think this phenomenon can only accelerate in the years ahead.
I think also that modern algo and HFT trading can only precipitate more trend-following.
Billy