TRADING SYSTEMS
Calculate Those Results With This Effective Strategy
A Nonparametric Performance Measure
by Guy Brys and Luc Van Hof
Gauge the true quality of your buy and sell signals using these performance measures.
Many an indicator generates buy/sell signals, but how effective are they? We can measure the quality of such signals by embedding them into a fairly simple trading system. We will apply two performance measures - the classical return on account (ROA) and a nonparametric one (ACC) - to four indicators to measure the quality of the buy/sell signals, followed by a walk-forward optimization and a discussion of the results.
IN THEORY
Generally speaking, a trading strategy is a collection of rules triggered by one or more indicators. Because of this, the quality of an indicator is often masked by the given strategy. Therefore, we will only vary the definition of the underlying indicator. This makes it possible to make an objective distinction between different indicators independent of external factors.
We used historical tick-by-tick data from the exchange rate of the euro (EUR) (the US dollar expressed in euros) in this study. Data prior to the euro's introduction on January 1, 1999, was computed from the Deutschemark expressed in US dollars (DEM) and other European currencies (see Figure 1).
Figure 1: DATA CALCULATION. Here's how the data for this study was expressed.
Each tick represents a transaction with the exact time (in seconds) and price at which the transaction took place. For computational reasons, we recorded all data without decimals (the measurement unit is one pip). The data was condensed to 15-minute time bars. Each entry in the new dataset contains the date, time, open, high, low, and close prices. A trading day is designated to be around 13 hours long (from 8:01 to 20:46), and in this setup, no position will be entered outside this range, although exits can take place.
A strategy's performance is highly influenced by the slippage and trade size (number of contracts traded). The slippage must be subtracted when you exit at a price different from the current price - that is, when you exit on a stop-loss. Slippage may be estimated as 0.03 * dailyrange. Slippage is not taken into account when exiting at the open or close.
...Continued in the January 2003 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the January 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.