A New Performance Statistic
This was originally inspired in a response to reader “SeekingBeta” who also had a very good idea for a performance metric. The following was take from the Community Forums on the DV Indicators website: http://www.dvindicators.com/community/forum/?vasthtmlaction=viewtopic&t=8.0#postid-44
Here is the original post (from me with a couple edits):
“hi , you just inspired me to create a new metric DVFE based on the fractal efficiency of the equity curve. perfect efficiency would imply that the curve had no wasted movement, and although short-term profit spikes would be somewhat penalized (nonetheless this is desirable as a profit spike is generally transient and the result of an extreme market regime)–typical upside movement would not be penalized. to calculate this metric one would have to use a continuous equity curve and a fixed bet methodology to avoid a lognormal curve that would distort results.An adjustment is also made for the number of trades which is useful to help avoid rewarding strategies with very few trades.
DVFE: CAGRx(absolute value of fractal efficiency)x(1-(1/(the square root of the #of trades))
where fractal efficiency (Kaufman’s fractal efficiency) is the net change in the equity curve divided by the sum of the absolute value of daily changes in the equity curve.”
This new performance statistic helps overcome many of the drawbacks of the DVR which can penalize upside volatility. Theoretically, the DVFE says that if something is going up 100% in a perfect straight line, that is more desirable than something that is going up 10% in a perfect straight line. This makes logical sense…..though I would always look at the DVR as well since upside volatility is a useful indicator of how much something could fall when a strategy or stock breaks down. There is little question that proportionately the stock that goes up 100% in a straight line will likely fall farther and faster than the stock that is going up 10% in a straight line.
DV2 available for free for Tradestation
Hi, DV2 is now available for free for Tradestation at www.dvindicators.com
a few more will be released over the next few days.
cheers
dv
New Indicators To Be Released
There is no fixed schedule for the new DV Indicators to be released. However there are currently 27 indicators coded for Tradestation and about 50 that I have developed. I would appreciate some feedback in the comments section as to which type of indicators you would like to see the most. As a side note, many of the indicators have already started to be coded for Amibroker and some of them will be release in the coming weeks. Here are some new ones that I am planning on releasing soon and will be introduced on the blog first with a description and some results.
1) DVPV and HV: these are volatility-based indicators, useful for developing trading systems as a filter
2) non-adaptive DVO and DVI: this DVO is the one displayed currently on the website, the adaptive will be ready in a few weeks (coding is complicated for this one). The DVI is an intermediate oscillator that comes with three indicators: DVI stretch, DVI magnitude and DVI composite which combines both.
3) DVBR: this is a short-term ”breakout” trend indicator and has performed exceptionally well since the rally began, and on the S&P500 for the last 50 years
4) the DV Stochastics Package: this includes a unique trend stochastic, cycle stochastic, and trend minus cycle stochastic. All of them perform very well and help provide unique insights into the relative trend or cycle component of the underlying. The final addition is the “Magic Stochastic” which has performed extremely well over the last 50 years as a mean reversion indicator. The Magic Stochastic is the most robust DV mean-reversion indicator and can be used on most stocks and asset classes.
5) DVT: this is a suite of 5 different trend indicators that incorporate volume and r-squared and various measures of trend to create trend signals. The baseline DVT vastly outperforms standard long-term trend indicators.
CFE Performance
Using Yahoo Finance Data:
Notes: The Raw CFE was used (not the percentrank), if CFE>0 then long, <0 then short
On QQQQ Last 2400 bars:
baseline CAGR: 5.4%
On SPY Last 2400 bars
CAGR: 4.4%
The Importance of Correlation and Combining Systems
One standard practice among traders is to trade multiple stocks, markets or systems in the hope that they will reduce total risk and improve consistency. But there are a lot of structural matters to consider to achieve good diversification. Here are some ways a trader can typically diversify:
1) Diversify using the system on multiple stocks
2)Diversify using the system on multiple markets
3) Diversify using multiple systems
4) Diversify using “structural” diversification: this involves buying asset classes like real estate/REITs, index funds, or fixed income where the trader does not have to rely on having winning systems or themselves to make a buck. This is a very important and neglected area that functions as a vital parachute when things are not going well.
to be continued…………
Code for Composite Fractal Efficiency Indicator (CFE)
If you like AggM you will love this one. I personally use this for a few different applications.
An excel example, and pdf with the calculation methodology for CFE will be available later today for free on www.dvindicators.com in the community/forum section. Users are encouraged to discuss and report results as well as help eachother apply the code to their own platforms. Comments about the concept or thoughts on improving the formula are welcome. Anyone who submits a trading system based on CFE on the site that is approved by the moderators will be eligible to receive credits towards any of the products on the site.
An attempt will be made to provide these highly popular “freebie” indicators almost every week. The goal is to build the community on the site so that people may share at a level that is not possible on this blog. There are a lot of very smart people that I have come across on this blog who are both very helpful and full of good ideas. The financial industry–especially on the quant side– is sorely lacking a quality source of collaboration and information exchange. This is a shame, because we can all learn something valuable from the next person. I have made my biggest leaps since starting this blog and coming into contact with a) people that have good answers, or b)people who ask good questions. Both are extremely valuable. As such in the DV Community any and all comments are welcome and you may ask dumb questions with no fear of public shame.
The Super-Charged DV2 (DVSC) Available
Hi folks, the Super-Charged DV2 (DVSC) indicator for TRADESTATION is currently available for sale on my new site (currently in beta):
If you are on the email distribution list for dvindicators@gmail.com we will be sending you a bonus code today for your early bird discount of 20%. Next week, the DVSC will be available as a package with my proprietary volatility indicators and most importantly: ” The Complete DVSC Strategy and Systems Guide” which gives you a background on how to use the DVSC (and the DV2 etc) to maximize your returns. Also contained are several trading systems that have extremely high winning % and gains per trade with very low drawdowns. You will also learn how to use filters to generate nearly over a 45% annualized return using the DVSC on the SPY and nearly 100% on EEM. The systems guide will also be available for individual purchase.
Starting next week we will be releasing new indicators every few days on the site. I will be introducing many of them on this blog and how to use them. Every indicator that is released will include a mini strategy guide and trading system(s). A free package of indicators that contains the DV2, DV Bands, DV Super-smoothed Double Stochastic, and the MMDI (my version of the MACD) will be available on the site shortly.
Warning Signs: How To Properly Trade A Long-Term Bearish Outlook
The bearish arguments these days are lost–drowned out by the buy and hold boys who monopolize the business media with their bullish rhetoric. Their tone is conservatively described as optimistic, and perhaps more realistically it sounds almost euphoric. After coming back from the brink of their complete demise, they are pounding the table with a little “I told you so!” Remember one thing if you are a trader, you do NOT have to buy and hold. However, the mutual fund crew MUST buy and hold, and from a business perspective it is in their best interests to encourage investors and traders to do so. I for one believe this market is but a castle built in the air and ripe for a thrashing. That said, I am unwilling to go full bear here. I prefer to go in and out–long and short with little exposure and lots of cash at this point to reduce risk. Renowned short-seller Doug Kass presents his view on the naiive optimism in the stock market: http://www.cnbc.com/id/33887718
How to play it: If you are long keep your trailing stops roughly 10% from the current closing price of the index, or 10% on each stock in your portfolio that is above its 50 day moving average. Aggressive investors can trim exposure here and wait for a pullback to re-enter, or they can short with a 5% stop to the upside with 10 or 20% exposure. In my opinion the 200 ma still serves as support, and until the 200 ma is broken decisively for at least a week to the downside, I wouldn’t take full short positions (ie net 50% short or higher).
Reader Suggestion For “A Quick Tip on Moving Averages”
Hi, one of our quant-oriented readers whose nickname is coincidentally “Quant” made a great suggestion regarding my suggested refinement. Quant says that instead of eliminating outlier values (above the 95th and below the 5th percentile by range) I should at least account for them by giving them a maximum or minimum value. The distortion created by eliminating them entirely would have less effect with a long moving average and a stock index, but with individual stocks and shorter moving averages this poses a problem. Along this line, I propose giving outlier values a maximum value that corresponds to the 80th percentile, and a minimum value that corresponds to the 20th percentile. In the future I will also discuss the importance of making these adjustments for more recent data vs past data.
