The examples presented on these pages are for educational purposes only and may not
be seen as investment advice! You, and only you, are responsible for what you are doing with your money.
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The goal with this strategy is to participate in the large trends on the (German)
stock market through long and short positions in the German DAX index.
When being short, the beta of the strategy is -1. To be able to outperform in long uptrends,
I decided to double the beta on long positions to +2.
The strategy has three possible states: long, short and flat with a beta of respectively 2, -1 and 0.
I have used the following indicators in this strategy:
- MACD (with 12 days EMA for the signal line)
- 50 days simple moving average (SMA)
The logic behind the strategy is as follows:
- if MACD crosses the signal line from below = go long
- if MACD crosses the signal line from above AND todays close < yesterdays 50SMA = go short
- if MACD crosses the signal line from above AND RSI > 65 = go short
For long and short positions a stop loss level of 5 % is applied.
When a trade is stopped out the state is flat.
Otherwise the strategy switches directly from long to short and from short to long.
Below the result of the backtest for the period 01/01/1995 until 31/01/2011 on a logarithmic scale.
The result is before fees, slippage and tax.
The strategy was fitted for the period 1995 until 2006, to have 4 years of out of sample data for testing.
The pure out of sample backtest is shown below.
The yearly rates of return are shown below:
The Sharpe Ratio of this strategy is 0.76 against a Sharpe Ratio of 0.38 for the DAX index (calculated with a
riskfree rate of 2 %).
It is clearly to see that the strategy has an edge in bear markets where it mostly outperforms the DAX.
But - as always - there is no free lunch meaning that this strategy is depended on trending markets and may lose sharply in whipsaw markets.