System Design Exercise

[Do Or Die 10]

Hi,

 

This follows from Three Steps in Trading System Design.

 

I will start with a rotational trading system as example. Hopefully this thread will help some people to get started; and, some others to share their experiences in improving the system design process itself.

 

Step 1: Set of Premise

"The sector ETF which is outperforming the market is likely a buy candidate; vice versa for shorts."

"Take only Long trades in a bull market, and only Short trades in a bear market."

 

Step 2: Taking the Premise to market

- Watchlist: XLB, XLY, XLP, XLE, XLF, XLV, XLI, XLK, XLU

- Relative Strength will be calculated as Returns(ETF)- Returns (S&P500) over past 30 days

- Each day the rank of ETFs is calculated, based on it's RS. The portfolio is adjusted each day to keep the top two best and worst performers as long and short respectively.

- To identify a bull/bear market, a simple filter is the change in prices over past 6 months. I use the filter current Close- Close(125 days back) > 0

- Protective stops are applied, say 2%

 

We see two immediate problems at this stage:

1. Rank volatility, which results in too frequent trades.

2. Since the strategy picks up ETFs with strongest momentum, it may pick one immediately after a upward spike or parabolic upmove.

 

Trades frequency can be adjusted using three ways:

1.) Exit a trade only on new week / month

2.) Different criteria for Buy and Short, as well as exit

3.) Smooth the rank over some bars

4.) Combination of above

Using the simplest of all, i.e. to exit a trade only on a new month, the strategy shows some profits.

 

 

I will continue after input from members, Amibroker code is attached.

roational-rudimentary.txt