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Mechanical trading systems - Weissman R.L.

Weissman R.L. Mechanical trading systems - Wiley publishing , 2005 . - 240 p.
ISBN 0-471-65435-3
Download (direct link): mechanicaltradingsystems2005.pdf
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TABLE 4.1 Fixed dollar stops.
Asset Stop
ES $2,500
TY $2,500
ED $500
SF $2,500
JY $2,500
CL $2,500
GC $1,000
S $1,500
LH $1,500
CT $2,500
Mean Reversion Systems
TABLE 4.2 RSI extremes with 200-day moving average filter.
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Asset Profit # Trades # Days Max Draw MDD MCL P:MD P:L Ratio %W Time %
ES 10441 39 22 -14934 1111 3 0.70 1.34 66.67 32.35
TY -2494 34 27 -12175 2300 6 -0.20 0.90 58.82 34.83
ED -2130 38 22 -4349 2421 5 -0.49 0.71 55.26 32.26
SF 10350 38 20 -8662 519 3 1.19 1.26 60.53 28.78
JY -10575 43 20 -26362 1063 4 -0.40 0.85 46.51 30.87
CL 14700 43 22 -9520 1224 3 1.54 1.44 65.12 35.41
GC 2540 42 22 -7340 1546 3 0.35 1.12 64.29 34.16
S -7325 34 25 -16512 1394 4 -0.44 0.71 50.00 32.80
LH 2950 44 21 -8500 1124 3 0.35 1.11 61.36 34.26
CT 3860 33 24 -14460 780 5 0.27 1.10 57.58 30.80
Total 22317 388 23.4 - 31448 1583" 6 0.71 1.06 58.76 32.7
“Portfolio still undergoing longest drawdown at backtesting end date.
Note: All trade summaries include $100 round-turn trade deductions for slippage and commissions. Data source: CQG, Inc.
If certain assets are appropriate for backtesting of trend-following systems and not for mean reversion systems, what types of assets should be included in our mean reversion portfolio? Obviously these assets would need to exhibit greater volatility than eurodollars; beyond this volatility criterion, we would ideally like to choose assets that display a greater propensity for mean reversion than the assets chosen in Table 4.2.
Close examination of the mean reversion charts in Chapter 2 reveals that I used either the equity indices or non-U.S. dollar-denominated interbank foreign exchange cross rates exclusively. As explained in Chapter 3, historically these assets have exhibited a greater propensity toward mean reversion than other asset classes. Consequently, for the remainder of this chapter I will use the portfolio of asset shown in Table 4.3.
There are many issues to address regarding the composition of our new portfolio. The first is a review of the liquidity problem. Although foreign exchange is the most liquid of all asset classes, the majority of foreign exchange transactions are dollar denominated. Because our mean reversion portfolio will focus exclusively on non-dollar-denominated cross rates, I have decided to include only currencies of the largest, developed nations: euro, Japanese yen, British pound, Swiss franc, Canadian dollar, and Australian dollar.
A more obvious problem with the portfolio is its large weighting of foreign exchange cross rates. This could result in a high correlation of portfolio assets. In an attempt to minimize the strong positive correlation among assets within the portfolio, since the highest correlations among foreign
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MECHANICAL TRADING SYSTEMS
TABLE 4.3 Mean reversion portfolio.
Asset Symbol Contract Size
E-Mini S&P 500 ES 50
DM-Euro/U.S. Dollar IEURUSD 100,000
DM-Euro/Japanese Yen IEURJPY 1,000
DM-Euro/Swiss Franc IEURCHF 100,000
DM-Euro/Canada $ IEURCAD 100,000
Australian $/Canada $ IAUDCAD 100,000
Canada $/Japanese Yen ICADJPY 1,000
British Pound/Australian $ IGBPAUD 60,000
British Pound/Swiss Franc IGBPCHF 60,000
Note: All trade summaries include $100 round-turn trade deductions for slippage and commissions. Data source: CQG, Inc.
currencies have been between the euro and Swiss franc, despite their superior performance, I have decided to eliminate cross rates such as Swiss franc-Japanese yen and Canada dollar-Swiss franc from our portfolio.
Unfortunately, the mean reversion portfolio does not have the same number of assets as its trend-following counterpart. As a result, comparisons between the two portfolios will necessarily be flawed. Although I recognize this limitation, I chose to focus on a portfolio with superior liquidity and a relatively low correlation between assets instead of the “best fit” for comparative analysis.
Finally, in Chapter 3 I chose to include one mean reverting asset in the trend-following portfolio to ensure the robustness of the trading system. Following this same reasoning, one trending asset (IEURUSD) has been included in our mean reversion portfolio.
Table 4.4 presents the backtested results from December 31, 1992, to December 31, 2002, for the RSI extremes system on our mean reversion portfolio.
As expected, performance has improved considerably when compared to Table 4.2. Nevertheless, when measured against the performance of the more robust trend-following systems examined in Chapter 3, the RSI extremes system still falls short. For example, our mean reverting system experienced a profit to maximum drawdown (P:MD) of 2.27 percent; by contrast, the two moving average system yielded a P:MD of 4.24 percent (see Table 3.2). These numbers should not surprise us; the cutting short of profits at the mean commonly results in the underperformance of mean reversion systems.
This comparison does not suggest that traders should abandon mean reversion strategies in favor of trend-following systems. It all depends on the individual trader’s psychological makeup. Do not underestimate the
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