Test Data
Daily prices for the 30 stocks making up the Dow Jones Industrial Average. A total
of $10 slippage and commission deducted per trade.Starting Equity
$1 million (nominal).System Analysis
The results of this system are amazing by any standard. The average annual return
is almost 18 percent, which is close to twice the buy-and-hold return on the Dow
Jones over the same period. The largest drawdown is 7.3 percent, while the longest
flat time is six months. For a buy-and-hold strategy on the DJIA, which performed
far better than the S&P 500 and NASDAQ indices, those numbers were 36 percent
and 30 months, respectively. Also, this system is completely unoptimized, which
proves two things:
First, a system doesn’t have to be complicated to be profitable. Second, the
fewer the rules and the easier the system is to understand, the more likely it will
continue to hold up in the future. Because the stock market does not behave the
same in a downtrend as it does in an uptrend, to improve this system, the long and
short trades could be separated and the entry and exit rules tailored to each.
By either removing a few long-entry rules or adding a few short-entry rules,
the system’s performance would likely improve and make it relatively easier to
enter on the long side.
Likewise, it would probably help to make it relatively easier to exit the short
trades by tightening the short-trade exits or loosening the long-trade exits.
However, why tinker? This system is already delivering a risk-adjusted return
well above that of the buy-and-hold strategy.CHAPTER 28 Combined Money Market Strategies 377