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= Indicators =


== Moving Average Convergence Divergence (MACD) ==
== Moving Average Convergence Divergence (MACD) ==
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* The calculation involves finding both positive and negative directional movement and then calculating the smoothed average of the difference of these
* The calculation involves finding both positive and negative directional movement and then calculating the smoothed average of the difference of these


== On Balance Volume ==
== On Balance Volume (OBV) ==


* OBV is a momentum indicator that assumes volume precedes movement and changes in trading volume are an indicator of future asset price moves
* OBV is a momentum indicator that assumes volume precedes movement and changes in trading volume are an indicator of future asset price moves
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=== Compounded Annual Growth Rate (CAGR) ===
=== Compounded Annual Growth Rate (CAGR) ===
* CAGR = End Value / Beginning Value ^ [1/years] - 1


* CAGR is the annual rate of return realized by an asset/portfolio to reach its current market value from its initial value
* CAGR is the annual rate of return realized by an asset/portfolio to reach its current market value from its initial value
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* Does not reflect investment risk and therefore should always used in conjunction with a volatility measure
* Does not reflect investment risk and therefore should always used in conjunction with a volatility measure
=== Annualized Volatility ===
* Volatility of a strategy is represented by the standard deviation of the returns. This captures the variability of returns from the mean return
* Annualization is achieved by multiplying volatility with square root of the annualization factor
* Widely used measure of risk, however assumes normal distribution of returns (which if often not true)
* Does not capture tail risk
=== Sharpe Ratio ===
* Sharpe Ratio = Expected Return - Risk Free rate of return / Op
* Sharpe ratio is the average return earned in excess of the risk free rate per unit of volatility
* Widely used measure of risk adjusted return
* Investors pay close attention to this metric when comparing funds
* Sharpe ratio greater than 1 is considered good, greater than 2 is very good and greater than 3 is excellent
=== Sortino Ratio ===
* Sortino ratio is a variation on Sharpe ratio which takes into account the standard deviation of only negative returns
* One of the criticism of Sharpe ratio is that it fails to distinguish between upside and downside fluctuation. Sortino makes that distinction by only measuring harmful volatility
=== Maximum Drawdown ===
* Largest percentage drop in asset price over a specified time period (distance between high and low)
* Investments with longer backtesting period will likely have larger max drawdown and therefore caution must be applied in comparing across strategies
=== Calmar Ratio ===
* Calmar Ratio = Compounded Annual Return /
* Calmer Ratio is the ratio of CAGR and Max drawdown and it's a measure of risk adjusted return
= Stategies =
== Strategy 1: Simple Rebalance ==
* Choose a sample of stocks and use this to iteratively develop a portfolio
* Rebalance the portfolio each month by removing x under-performing stocks and replacing them with top x stocks from the sample
* Backtest the strategy and compare the KPs with that of a simple buy and hold strategy of corresponding index
== Strategy 2: Resistance Breakout ==
* Resistance breakout means that the stock has breached a presumed resistance level (based on historical prices)
* Choose high volume, high activity stocks for this strategy (pre market movers, high volume stocks)
* Define breakout rule: in their case, price breaching 20 period rolling max/min price in conjunction volume breaching rolling max volume
* Define stop loss: in their case, previous price plus/minus 20 period ATR
* Backtest strategy by calculating the cumulative return for each stock
== Strategy 3: Intraday Renko OBV ==
* Combination of Renko charts and OBV indicator
* Choose high volume, high activity stocks for this strategy (pre market movers, high volume stocks)
* Buy signal:
** Renko bar  >= 2
** 5 day OBV slope greater than 30 degrees
** Exit if Renko is less than 2
* Sell Signal:
** Renko bar <= -2
** 5 day OBV slope less than -30 degrees
** Exit if Renko is greater than -2

Latest revision as of 03:33, 6 January 2021

Indicators

Moving Average Convergence Divergence (MACD)

  • Momentum indicator calculated by taking the difference of two moving averages of an asset price (typically 12 period MA and 26 period MA).
  • A signal line is also calculated which is again a MA (typically 9 period) of the MACD line
  • The MACD line cutting the signal line from below signals bullish period and the former cutting the latter from above signals bearish (also called crossover strategy)
  • Many false positives -- especially during sideways market
  • Suggested to be used in conjunction with other indicators
  • Lagging indicator - trails behind the actual price action

Bollinger Bands

  • Volatility based indicators
  • Bollinger band comprises two lines plotted n (typically 2) standard deviations from a m period (typically 20) simple moving average line. The bands widen during periods of increased volatility.

Average True Range (ATR)

  • ATR takes account the market movement each day in either direction and averaging them out.
  • It focuses on total price movement and conveys how wildly the market is swinging as it moves
  • Traders typically use bollinger bands and ATR in conjunction as tehy approach volatility differently and are complimentary

Relative Strength Index (RSI)

  • RSI is a momentum oscillator which measures the speed and change of price movements
  • RSI value oscillates between 0 and 100
    • with values above 70 indicating that the asset has now reached overbought
    • with values below 30 signifying oversold
  • Overbought and underbought conditions can persist for long periods

Average Directional Index (ADX)

  • ADX is a way of measuring the strength of a trend
  • Values range from 0 to 100
    • 0-25 = weak
    • 25-50 = strong
    • 50-75 = very strong
    • 75-100 = extremely strong
  • ADX is non directional and only tells us the strength of the trend
  • The calculation involves finding both positive and negative directional movement and then calculating the smoothed average of the difference of these

On Balance Volume (OBV)

  • OBV is a momentum indicator that assumes volume precedes movement and changes in trading volume are an indicator of future asset price moves
  • Leading market indicator but prone to making false signals. Typically used in conjunction with lagging indicators such as MACD
  • Is simply the cumulative sum of volume traded adjusted for the direction of the corresponding asset move

SUpertrend

Renko Charts

KPI

Compounded Annual Growth Rate (CAGR)

  • CAGR = End Value / Beginning Value ^ [1/years] - 1
  • CAGR is the annual rate of return realized by an asset/portfolio to reach its current market value from its initial value
  • CAGR calculation assumes profits are continuously reinvested
  • Provides ease of comparison between different trading strategies
  • Does not reflect investment risk and therefore should always used in conjunction with a volatility measure

Annualized Volatility

  • Volatility of a strategy is represented by the standard deviation of the returns. This captures the variability of returns from the mean return
  • Annualization is achieved by multiplying volatility with square root of the annualization factor
  • Widely used measure of risk, however assumes normal distribution of returns (which if often not true)
  • Does not capture tail risk

Sharpe Ratio

  • Sharpe Ratio = Expected Return - Risk Free rate of return / Op
  • Sharpe ratio is the average return earned in excess of the risk free rate per unit of volatility
  • Widely used measure of risk adjusted return
  • Investors pay close attention to this metric when comparing funds
  • Sharpe ratio greater than 1 is considered good, greater than 2 is very good and greater than 3 is excellent

Sortino Ratio

  • Sortino ratio is a variation on Sharpe ratio which takes into account the standard deviation of only negative returns
  • One of the criticism of Sharpe ratio is that it fails to distinguish between upside and downside fluctuation. Sortino makes that distinction by only measuring harmful volatility

Maximum Drawdown

  • Largest percentage drop in asset price over a specified time period (distance between high and low)
  • Investments with longer backtesting period will likely have larger max drawdown and therefore caution must be applied in comparing across strategies

Calmar Ratio

  • Calmar Ratio = Compounded Annual Return /
  • Calmer Ratio is the ratio of CAGR and Max drawdown and it's a measure of risk adjusted return

Stategies

Strategy 1: Simple Rebalance

  • Choose a sample of stocks and use this to iteratively develop a portfolio
  • Rebalance the portfolio each month by removing x under-performing stocks and replacing them with top x stocks from the sample
  • Backtest the strategy and compare the KPs with that of a simple buy and hold strategy of corresponding index

Strategy 2: Resistance Breakout

  • Resistance breakout means that the stock has breached a presumed resistance level (based on historical prices)
  • Choose high volume, high activity stocks for this strategy (pre market movers, high volume stocks)
  • Define breakout rule: in their case, price breaching 20 period rolling max/min price in conjunction volume breaching rolling max volume
  • Define stop loss: in their case, previous price plus/minus 20 period ATR
  • Backtest strategy by calculating the cumulative return for each stock

Strategy 3: Intraday Renko OBV

  • Combination of Renko charts and OBV indicator
  • Choose high volume, high activity stocks for this strategy (pre market movers, high volume stocks)
  • Buy signal:
    • Renko bar >= 2
    • 5 day OBV slope greater than 30 degrees
    • Exit if Renko is less than 2
  • Sell Signal:
    • Renko bar <= -2
    • 5 day OBV slope less than -30 degrees
    • Exit if Renko is greater than -2