Intermarket Trading Strategies
The relative strength (RS) technique is a popular and useful tool for comparing one investment against the overall market. But few individuals ever manage to use the technique effectively, because they fail to incorporate RS into a comprehensive trading strategy.
I used the relative strength concept to developed two strategies: RS for stocks and RS for Exchange traded funds (ETF).
To develop the RS systems I used a proprietary custom relative strength indicator to select the strongest stocks or ETF relative to the overall market. Testing the RS stock system on 2500 US stocks during the past 10 years it outperformed the bench mark (S&P 500) considerably producing (without optimization) a compounded annual return of 14.3%, a profit factor of 2.38, and a maximum intraday drawdown of only -2.6%. By comparison the SPY ETF produced over the same time period a compounded annual return of only 2.1% and a devastating drawdown of -83%.
The systems are available in two versions: Metastock and Easy language. The metastock version consists of two explorations, a custom RS indicator, an expert advisor an enhanced system test and the manual. The easy language can be run on Tradestation or Multicharts and consists of a strategy (signal), the RS custom indicator and the manual.
Relative Strength for metastock
RS Easy Language Strategy for Multicharts
This is how the system performed 15 trading days ( 3 weeks) after the entry signals on a portfolio of 2500 US stocks during the 10 year period from 5/25/ 2002 to 5/25/12. To produce the test results I used Tradesim (metastock plug-in) with the following input parameters:
Initial trading capital = $300,000
Capital per trade= $20,000 (Equal dollar units) and no margin.
Max. Open positions: 20
Commissions: $5 per trade
Volume filter: Limit position to 8% of trading volume
Minimum Trade size:$2000
Test date: 5/25/2012
Data loaded : 2720 records
Time Stop: 14 days (not counting entry day).
Entry at the close & Exit next day at the open.
Why don't I get any hits?
Check out the errors at the rejects column. If you see "Results of filter formula not defined on calculation date" you will need to load more data. To calculate RS and other indicators you will need at least 200 records of data.
Why do the explorations take too long to run?
Because of the large amount of data required it will be quicker to run the exploration on data stored in your hard disk rather than online.
Why do I get only very few hits?
Unlike the Equis built in explorations which produce >50 hits but with a low probability of winning, my explorations filter the results with other indicators and select the most probable winners. Another reason for a low turnover is that you might run the explorations on too few stocks. Personally I run the explorations on 2500 US stocks and 500 Australian stocks and usually get 0-10 hits a week depending on market conditions.
Do the explorations work with FOREX?
No, they don't work if there is no volume.This is because they use volume indicators to filter the results. They do work though with FOREX futures. A way to get around the volume problem is to add 1000 to the volume field using the downloader. This will mean, however, that volume filters will not work.
Can I use this exploration with Australian stocks?
Yes the system works for International stocks as well. You you will only have to change the comparison Index (S&P 500) to your country's appropriate Index. If you want me to do it you will have to let me know the location in your hard drive of the Index (e.g. C:/ Metastock data/Australian/^AORD) to change it and send you the appropriate files for your computer.
Anybody can produce good historical performance if the system is optimized enough. How do we know that it will perform just as well in the future?
First of all I did not optimize parameters (You can't optimize metastock explorations ) .
And secondly the fact that the system performed so well on a portfolio of 2500 stocks suggests that the system is robust enough to perform well in the future.
Is the code password protected? Can I modify it?
No, it is not password protected.
Does it work with all stock and ETF sectors?
I recommend to avoid small cap biotech stocks. This is because these stocks have no earnings and can be unpredictable and volatile as they and move only on news of success or failure of new drugs.
FREQUENTLY ASKED QUESTIONS (FAQ)
RS for Tradestation