Technical Indicators and Algorithmic Trading
1.1 Study 3 : Effectiveness of Technical Indicators in Algorithmic Trading
1.1.1 Objective
Objective: To simulate algorithmic trading using strategies based on Technical Indicators, on Historic Stock Market Price Data and to compare the profits/losses made using each strategy
1.1.2 Method:
- The Strategies are listed.
- The strategies are back-tested using historical price data of a stock that has had a bear run.
- The profits/losses are compared.
- The strategy with the highest profit is picked as the best strategy.
1.1.3 Strategy 1
- Buy at every EMA 26-Price intersection as EMA curve is Crossed by Price Curve from below
- Sell at every EMA 26-Price intersection as EMA curve is Crossed by Price Curve from above
1.1.3.1 Results –Strategy 1
Initial Capital = 1,000,000 US $
Time Period = 11 months
Stock: Merrill Lynch (MER)
Profit = 122,109$
Portfolio Initialized,Year High set to, 0
Amount set to 1e+006
Number set to 0
Falling Signal Detected at Price = 90.44
Rising Signal Detected at Price = 92.18
Bought Shares at91.824 Number = 10890.4
Falling Signal Detected at Price = 92.88
Sold Shares at93.288 ,Number = 0 ,Amount = 1.01594e+006
Rising Signal Detected at Price = 93.13
Bought Shares at92.89 Number = 10937.1
Falling Signal Detected at Price = 92.69
Sold Shares at92.943 ,Number = 0 ,Amount = 1.01652e+006
Rising Signal Detected at Price = 93.23
Bought Shares at92.933 Number = 10938.2
Falling Signal Detected at Price = 91.34
Sold Shares at92.888 ,Number = 0 ,Amount = 1.01603e+006
Rising Signal Detected at Price = 84.22
Bought Shares at83.7385 Number = 12133.4
Falling Signal Detected at Price = 82.78
Sold Shares at83.794 ,Number = 0 ,Amount = 1.0167e+006
Rising Signal Detected at Price = 84.23
Bought Shares at83.0645 Number = 12239.9
Falling Signal Detected at Price = 91.01
Sold Shares at91.01 ,Number = 0 ,Amount = 1.11396e+006
Rising Signal Detected at Price = 85.67
Bought Shares at85.468 Number = 13033.6
Falling Signal Detected at Price = 85.34
Sold Shares at85.5155 ,Number = 0 ,Amount = 1.11458e+006
Rising Signal Detected at Price = 76.03
Bought Shares at75.733 Number = 14717.2
Falling Signal Detected at Price = 75.48
Sold Shares at75.7275 ,Number = 0 ,Amount = 1.11449e+006
Rising Signal Detected at Price = 75.76
Bought Shares at75.732 Number = 14716.3
Falling Signal Detected at Price = 74.49
Sold Shares at75.6965 ,Number = 0 ,Amount = 1.11397e+006
Rising Signal Detected at Price = 75.02
Bought Shares at74.849 Number = 14882.9
Falling Signal Detected at Price = 73.6
Sold Shares at74.736 ,Number = 0 ,Amount = 1.11229e+006
Rising Signal Detected at Price = 74.74
Bought Shares at74.089 Number = 15012.9
Falling Signal Detected at Price = 72.46
Sold Shares at74.071 ,Number = 0 ,Amount = 1.11202e+006
Rising Signal Detected at Price = 75.42
Bought Shares at74.088 Number = 15009.5
Falling Signal Detected at Price = 73.29
Sold Shares at74.278 ,Number = 0 ,Amount = 1.11487e+006
Rising Signal Detected at Price = 73.48
Bought Shares at73.48 Number = 15172.5
Falling Signal Detected at Price = 73.72
Sold Shares at73.847 ,Number = 0 ,Amount = 1.12044e+006
Rising Signal Detected at Price = 73.95
Bought Shres at73.95 Number = 15151.3
Falling Signal Detected at Price = 73.21
Sold Shares at74.079 ,Number = 0 ,Amount = 1.1224e+006
Long only Profit = 122395
The Buy and Hold Profit = -421722
——————
Short Only profit = 0
Latest Price = 53.19
No.of Outstanding shares = 0 And if covered at current priceAddl Profit = 0
Total Short Selling Profit = 0
———————-
Total Profit, Short and long = 122395
Total Commission = 285.74
Nett Profit after Commissions = 122109
1.1.4 Strategy 2
1.1.4.1 Description of Strategy:
- Buy at every EMA 26-Price intersection as EMA curve is Crossed by Price Curve from below
- Sell at every EMA 26-Price intersection as EMA curve is Crossed by Price Curve from above
- Short- Sell at every EMA 26-Price intersection as EMA curve is Crossed by Price Curve from abov
- Buy to cover at every EMA 26-Price intersection as EMA curve is Crossed by Price Curve from below
1.1.4.2 Results using Strategy 2
Initial Capital = 1,000,000 US $
Time Period = 11 months
Stock: Merrill Lynch (MER)
Profit = 1,032,000 US $
Portfolio Initialized,Year High set to, 0
Amount set to 1e+006
Number set to 0
Rising Signal Detected at Price = 37.28
Bought Shares at37.052 Number = 26989.1
Falling Signal Detected at Price = 37.39
Sold Shares at38.1925 ,Number = 0 ,Amount = 1.03078e+006
Short Sold Shares at38.1925 ,Number = 26183.2 ,Amount = 0
Rising Signal Detected at Price = 33.38
Bought Shares at31.8695 Number = 32343.8
Covered Shares at31.8695 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 165556
Falling Signal Detected at Price = 38.19
Sold Shares at38.357 ,Number = 0 ,Amount = 1.24061e+006
Short Sold Shares at38.357 ,Number = 26070.9 ,Amount = 0
Rising Signal Detected at Price = 38.55
Bought Shares at38.4125 Number = 32297.1
Covered Shares at38.4125 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = -1446.9
Falling Signal Detected at Price = 38.27
Sold Shares at38.413 ,Number = 0 ,Amount = 1.24063e+006
Short Sold Shares at38.413 ,Number = 26032.9 ,Amount = 0
Rising Signal Detected at Price = 39.51
Bought Shares at38.456 Number = 32261
Covered Shares at38.456 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = -1119.5
Falling Signal Detected at Price = 48.37
Sold Shares at48.513 ,Number = 0 ,Amount = 1.56508e+006
Short Sold Shares at48.513 ,Number = 20613 ,Amount = 0
Rising Signal Detected at Price = 48.84
Bought Shares at48.477 Number = 32284.9
Covered Shares at48.477 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 742.063
Falling Signal Detected at Price = 48.46
Sold Shares at48.498 ,Number = 0 ,Amount = 1.56575e+006
Short Sold Shares at48.498 ,Number = 20619.4 ,Amount = 0
Rising Signal Detected at Price = 49.73
Bought Shares at48.5235 Number = 32268
Covered Shares at48.5235 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = -525.75
Falling Signal Detected at Price = 49.31
Sold Shares at49.3515 ,Number = 0 ,Amount = 1.59247e+006
Short Sold Shares at49.3515 ,Number = 20262.8 ,Amount = 0
Rising Signal Detected at Price = 49.75
Bought Shares at49.36 Number = 32262.4
Covered Shares at49.36 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = -172.25
Falling Signal Detected at Price = 49.76
Sold Shares at50.2815 ,Number = 0 ,Amount = 1.6222e+006
Short Sold Shares at50.2815 ,Number = 19888 ,Amount = 0
Rising Signal Detected at Price = 51.05
Bought Shares at50.258 Number = 32277.
Covered Shares at50.258 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 467.313
Falling Signal Detected at Price = 50.81
Sold Shares at51.4135 ,Number = 0 ,Amount = 1.6595e+006
Short Sold Shares at51.4135 ,Number = 19450.1 ,Amount = 0
Rising Signal Detected at Price = 51.57
Bought Shares at51.418 Number = 32274.7
Covered Shares at51.418 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = -87.5
Falling Signal Detected at Price = 50.51
Sold Shares at51.358 ,Number = 0 ,Amount = 1.65756e+006
Short Sold Shares at51.358 ,Number = 19471.2 ,Amount = 0
Rising Signal Detected at Price = 52.01
Bought Shares at51.41 Number = 32242
Covered Shares at51.41 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = -1012.56
Falling Signal Detected at Price = 52.61
Sold Shares at53.22 ,Number = 0 ,Amount = 1.71592e+006
Short Sold Shares at53.22 ,Number = 18789.9 ,Amount = 0
Rising Signal Detected at Price = 54.49
Bought Shares at53.14 Number = 32290.5
Covered Shares at53.14 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 1503.19
Falling Signal Detected at Price = 53.43
Sold Shares at54.743 ,Number = 0 ,Amount = 1.76768e+006
Short Sold Shares at54.743 ,Number = 18267.2 ,Amount = 0
Rising Signal Detected at Price = 54.23
Bought Shares at53.771 Number = 32874.3
Covered Shares at53.771 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 17755.7
Falling Signal Detected at Price = 53.81
Sold Shares at53.81 ,Number = 0 ,Amount = 1.76896e+006
Short Sold Shares at53.81 ,Number = 18583.9 ,Amount = 0
Rising Signal Detected at Price = 53.38
Bought Shares at53.282 Number = 33200
Covered Shares at53.282 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 9812.25
Long only Profit = 842269
The Buy and Hold Profit = 498110
——————
Short Only profit = 191472
Latest Price = 55.49
No.of Outstanding shares = 0 And if covered at current priceAddl Profit = 0
Total Short Selling Profit = 191472
———————-
Total Profit, Short and long = 1.03374e+006
Total Commission = 538.51
Nett Profit after Commissions = 1.0332e+006
1.1.5 Strategy 3:
1.1.5.1 Description of Strategy:
- Buy when RSI <30
- Sell when RSI >70
An RSI value of >70 indicates an overbought condition. Similarly, an RSI value of <30 indicates an oversold condition. Thus, by selling when the stock is overbought and buying when the security is oversold, we can hope to make a profit.
1.1.5.2 Results using Strategy 3
Initial Capital = 1,000,000 US $
Time Period = 11 months
Stock: Merrill Lynch (MER)
Profit = = -159,766
Results for Merrill Lynch (MER) from 2nd Jan 2007 – 1st November 2007
Portfolio Initialized,Year High set to, 0
Amount set to 1e+006
Number set to 0
RSI = 0
Bought Shares at90.44 Number = 11057.1
RSI = 0
RSI = 56.7359
RSI = 51.7481
RSI = 63.0306
Sold Shares at92.8 ,Number = 0 ,Amount = 1.02609e+006
Short Sold Shares at92.8 ,Number = 10775.9 ,Amount = 0
RSI = 75.4367
RSI = 78.5844
RSI = 76.2707
RSI = 75.5204
RSI = 58.395
RSI = 61.5351
RSI = 65.2873
RSI = 55.5088
RSI = 66.3841
RSI = 51.3111
RSI = 47.7998
RSI = 38.9173
RSI = 40.949
RSI = 45.2636
RSI = 51.1224
RSI = 52.1819
RSI = 51.0899
RSI = 48.6799
RSI = 51.576
RSI = 50.605
RSI = 41.9711
RSI = 37.0495
RSI = 42.51
RSI = 49.969
RSI = 49.0404
RSI = 45.396
RSI = 45.1243
RSI = 42.9942
RSI = 39.6947
RSI = 31.2917
RSI = 25.6456
Bought Shares at85.47 Number = 12005.3
Covered Shares at85.47 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 78987.1
RSI = 20.2627
RSI = 21.6546
RSI = 22.0074
RSI = 19.5366
RSI = 16.7281
RSI = 27.649
RSI = 28.1819
RSI = 33.1149
RSI = 32.4309
RSI = 35.0777
RSI = 27.0798
RSI = 26.1908
RSI = 30.6277
RSI = 30.0967
RSI = 37.0715
RSI = 40.2475
RSI = 51.8001
RSI = 50.647
RSI = 52.6941
RSI = 52.582
RSI = 46.5529
RSI = 41.5861
RSI = 39.4657
RSI = 40.1166
RSI = 44.8156
RSI = 53.9954
RSI = 53.7345
RSI = 56.1224
RSI = 58.3185
RSI = 57.8652
RSI = 54.3518
RSI = 54.1672
RSI = 55.8663
RSI = 64.9003
Sold Shares at87.79 ,Number = 0 ,Amount = 1.05395e+006
Short Sold Shares at87.79 ,Number = 11390.8 ,Amount = 0
RSI = 66.8287
RSI = 69.173
RSI = 66.1757
RSI = 70.9145
RSI = 68.0133
RSI = 64.928
RSI = 67.0253
RSI = 63.4796
RSI = 58.856
RSI = 59.2926
RSI = 60.5
RSI = 62.8082
RSI = 66.4918
RSI = 68.8375
RSI = 66.9073
RSI = 60.0136
RSI = 64.3743
RSI = 56.2683
RSI = 64.3311
RSI = 58.9401
RSI = 55.4745
RSI = 58.4828
RSI = 57.2162
RSI = 63.399
RSI = 61.7194
RSI = 62.2906
RSI = 61.2488
RSI = 54.9767
RSI = 51.4223
RSI = 56.5948
RSI = 55.6942
RSI = 54.4974
RSI = 56.9311
RSI = 49.9722
RSI = 49.1551
RSI = 42.8362
RSI = 33.0215
RSI = 40.3528
RSI = 40.908
RSI = 36.1
RSI = 46.6249
RSI = 47.9006
RSI = 48.2542
RSI = 47.4048
RSI = 47.586
RSI = 39.0815
RSI = 37.8937
RSI = 30.535
RSI = 29.4502
Bought Shares at83.14 Number = 12676.8
Covered Shares at83.14 ,Number = 0 ,Short Money = 1e+006
Profit from this pair of trades = 52967.3
RSI = 32.057
RSI = 40.5748
RSI = 39.8694
RSI = 33.292
RSI = 33.1213
RSI = 39.3141
RSI = 36.75
RSI = 40.3451
RSI = 43.4555
RSI = 34.9316
RSI = 37.9644
RSI = 47.3383
RSI = 50.6706
RSI = 53.3236
RSI = 49.3325
RSI = 41.3841
RSI = 39.6707
RSI = 33.8941
RSI = 33.9337
RSI = 28.5682
RSI = 32.4528
RSI = 28.6724
RSI = 27.7059
RSI = 33.3904
RSI = 29.1041
RSI = 27.8582
RSI = 27.0759
RSI = 23.5353
RSI = 39.0501
RSI = 40.9042
RSI = 48.6994
RSI = 41.7302
RSI = 40.7147
RSI = 39.6358
RSI = 35.7862
RSI = 32.0954
RSI = 38.3582
RSI = 49.5969
RSI = 47.4341
RSI = 49.9378
RSI = 50.6362
RSI = 49.3959
RSI = 50.0683
RSI = 47.0085
RSI = 40.9069
RSI = 43.92
RSI = 41.9662
RSI = 46.1914
RSI = 50.5645
RSI = 47.1294
RSI = 46.481
RSI = 45.1395
RSI = 43.7016
RSI = 45.2866
RSI = 44.9167
RSI = 51.9867
RSI = 50.4089
RSI = 45.0182
RSI = 53.835
RSI = 55.451
RSI = 51.8469
RSI = 50.0889
RSI = 46.9517
RSI = 42.6267
RSI = 41.67
RSI = 41.0891
RSI = 40.3371
RSI = 50.1202
RSI = 55.4419
RSI = 56.5075
RSI = 52.1062
RSI = 57.6424
RSI = 49.3232
RSI = 50.0285
RSI = 51.8838
RSI = 53.2808
RSI = 52.569
RSI = 46.9372
RSI = 41.4709
RSI = 41.0124
RSI = 36.76
RSI = 28.8583
RSI = 29.7618
RSI = 32.58
RSI = 25.8017
RSI = 22.7573
RSI = 39.8983
RSI = 43.3639
RSI = 39.883
RSI = 42.0815
RSI = 35.4593
RSI = 29.1157
RSI = 27.5954
Long only Profit = -291622
The Buy and Hold Profit = -392477
——————
Short Only profit = 131954
No.of Outstanding shares = 0 And if covered at current priceAddl Profit = 0
Total Short Selling Profit = 131954
———————-
Total Profit, Short and long = -159667
Total Commission = 98.91
Nett Profit after Commissions = -159766
1.2 Conclusion:
- Strategy 1 did well with a rate of return of about 12%
- Strategy 2 did exceedingly well with a rate of return of 103% over 7 months
- Strategy 3 made a loss of about 16% over 7 months and performed poorly
Therefore, it appears that Strategy 2 is the best strategy among the 3 strategies considered.
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