Thursday, January 21, 2010

Average True Range and its effect to various simple systems

This table presents simple concept and it is related to 5 different trend following systems of which one is using 7/21 EMA combo on Top40 (J200) 15min chart; three are using different EMA or SMA penetrations on Top40 (J200) 5min chart and the fifth one is using one of the variations of HH/HL principle on ALSI 30min chart.

Basic idea of this post is to show how, despite having clear daily follow-through to the upside (please consult attached EOD Top40 (J200) chart from 01.July 2009. till 15.January 2010.), various trend-following systems are suffering during periods of low volatility, which was, in this case, measured by 5-day and 10-day Average True Range expressed in percentage terms. Note how volatility droped from October 2008 when was highest from 1998.

In order to clarify attached table I will explain what happened to system named ‘15min 7/21 C’:
  • From 01. December 2008 till 14. January 2010 system made (after brokerage) total of 17088 points ouf of 221 trades or 77.32 points per trade.

  • When 5-day ATR% was bellwo average ATR% value (after each close), sysem made 1720 points out of 75 trades, or 22.93 points per trade. This is leaving us with 15368 poitns that wre made out of remainiing 146 trades, or 105.26 points per trade
Note: ATR% value was calculated on Top40 (J200) EOD chart after each close.

It is clear that we have identified underperforming periods for five systems by using these simple ATR% metrics. Practical application, in terms of switching systems On/Off or position sizing is completely different matter and warrants in-depth analysis, which, for now, exceeds boundaries of this blog.

Trade with trend!

For more reading on ATR please go to: