Ultimate Algorithmic Trading System

TABLE 3.5
Single Moving Average (SMA) Crossover Algorithm
SMA
Simple Moving Average Crossover
Length
Net
Profit
CAR
Max.
Sys DD
Profit
Factor
Ulcer
Index
#Trades
Avg
Profit/
Loss
Avg
Bars
Held
%of
Winners
19 −922061 −15.08 −986733 0.91 48.53 15814 −58.31 9.78 23.04
39 −15191 −0.1 −612726 1 16.1 11114 −1.37 13.49 19.97
100 564180 2.91 −626574 1.11 13.92 6543 86.23 21.94 16.25
200 487626 2.58 −492640 1.13 14.95 4495 108.48 30.67 12.77
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of the occurrence of different magnitudes of drawdown. This analysis will be
detailed in Chapter 8 along with Monte Carlo simulation.
Annual Return %—compounded annual return based on a cool million-dollar
investment.
Number of Trades: number of trades.
Profit/Loss—(Profit of winners / Loss of losers) / Number of trades. This is
also known as the expectancy in terms of dollars.
Bars Held—the number of bars, on average, a trade is held. You can use this as
a guide to align different parameters sets across different algorithms.
Total Transaction Costs—summation of execution fees.
Profit Factor—profit of winners divided by loss of losers.
Ulcer Index—square root of sum of squared drawdowns divided by number of
bars. It measures the volatility in the downward direction.
Sharpe Ratio—indicator of consistency. Average return divided by the standard
deviation of returns sampled on daily, monthly, or yearly basis. The higher the
better.
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COMPLETE TRADING ALGORITHMS
Armed with these performance metrics it is plain to see that the SMA as a complete
trading algorithm is not that good. I hope you weren’t surprised by this fact. Don’t
get me wrong; simple moving averages have their place in technical analysis, but
not as a complete trading algorithm. Results might improve utilizing an exponential
moving average, but not enough to consider it as your main trading tool. Notice
how the long-term version handily outperformed its shorter and intermediate-term
counterparts.
If a single moving average doesn’t cut the mustard, then what about two?
Table 3.6 shows the DMA utilizing three different lengths.
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