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Trade With The Trend: Using AggM as a Filter for Short-term Mean Reversion Indicators

February 17, 2010

In this example, we only permitted trades in the direction of the trend as defined by AggM (DVAM)which is a composite trend/mean-reversion indicator available at www.dvindicators.com.  Long trades were triggered when AggM rose above 65 and ended when AggM closed below 35.  During this time period, we traded DVO from the long side only, going  long<50, exiting above 50. Short trades began when AggM fell below 35, and were closed above 65. During this time period we traded DVO from the short side only, going short>50 and exiting below 50. Excluding 1998, this strategy produced strong returns and  very low drawdowns on average. This method works well with other indicators including RSI2 as well.

10 Comments leave one →
  1. February 17, 2010 11:26 am

    Looks interesting David. I had purchased a copy of DVO (trade station version) a while back just to support your efforts as I have not had a working copy of TS since it was called Super Charts. I was hoping you would come out with an excel version. You said in a message on DV indicator boards that you were working on it. Any progress? Jerry

    PS How’s the NAAIM paper coming?

    • david varadi permalink*
      February 17, 2010 5:58 pm

      hi Jerry, I appreciate that and did not realize that you did not have a functional copy. Our excel version is completed, we are just working out some bugs and adding two new features. If you send me your email (dmvaradi@gmail.com) I can follow up.
      The paper is coming well, its just a matter of compiling more data in a user-friendly manner and writing it up.
      best
      dv

  2. bill permalink
    February 17, 2010 11:30 am

    Are these indicators strictly for daily charts or can they be used intraday also?

    • david varadi permalink*
      February 17, 2010 5:58 pm

      hi bill, i would imagine this particular application would work intraday because it filters for trends.
      best
      dv

  3. Alfred permalink
    February 22, 2010 11:05 pm

    Hi,

    Great blog…

    I tried a little experiment with AggM on one of my trading systems. The system in question trades individual stocks based on a trend filter (180 day moving average), RSI(2) and then buys on a intraday limit order.

    I ran the test by replacing the MA filter with AggM. The result was that the system produced a lot more trades, the overall CAGR was almost the same (but slightly improved) but the drawdown was much worse. A quick look at the equity curve shows the system suffered its big drawdown from October 2008 – March 2009 bear market whereas the MA version was better at sitting out this period in cash, despite reduced opportunity.

    My conclusion that AggM didn’t do a better job than the MA filter in this particular system.

    – Alfed

    • david varadi permalink*
      February 23, 2010 4:01 am

      hi alfred, thanks very much. the nature of the system may require a different use of aggM than the previous example—one method that is more conservative is to exit<.5 or <.4. the classical method of using the aggm as a trend indicator is simply long above .5 and short below.5. the method that i used of going long at a high point and switching short at a very low point is designed to reduce noise for the DVO which gets you out very quickly. a typcial deep entry rsi system or even deep intraday limit would necessitate more conservative exits. there is nothing to suggest that you couldn't simple use the .65 or .5 for entry criteria (which should generate more trades) and exit below a 50,100, or 200sma as a backup emergency exit.
      dv

      • Alfred permalink
        February 23, 2010 11:03 pm

        Hi dv,

        Thanks for the ideas. I tried them all and making the ‘end of up trend’ AggM level more conservative (at 0.5) did reduce drawdown and improve overall and per-trade return. The drawdown was still worse than the original system, however.

        Not sure exactly how to interpret using the MA as an exit. I don’t see the point of using the MA at exit if the same MA is not already used as an entry criteria as well. If it is an entry criteria then the MA filter overrides the AggM filter because AggM never appears to trigger when the price is below these MA levels.

        I will continue to experiment with the AggM.

        – Alfred

  4. Jay Stevens permalink
    February 25, 2010 8:43 pm

    Hi David,

    I took the time to analyze the inner workings of your AggM and DVO indicators as was published in a couple of Excel spreadsheets I downloaded. In the process, I came across what could be a pretty gross error in the way performance was calculated. Maybe I’m missing something, but it appears that the way you calculated daily returns, or more accurately, added or subtracted points, is incorrect. From what I saw, the points that were added or subtracted (when going short) occurred one day in the future, not on the same day of the calculation (in other words, incorrect cells were referenced in the formulas that were used to compute returns). I can give you more specifics if you’d like, but before I did, I just wanted to give you a chance to look into this yourself and get your take on it. Thank you for all your hard work.

    – Jay

    • david varadi permalink*
      February 25, 2010 8:52 pm

      hi Jay, those are not my spreadsheets, nor are they the exact method for which the indicator is calculated–especially the DVO. The AggM should be nearly identical but I can’t speak for someone else’s spreadsheet. However i will say that in working with excel myself that it sometimes appears as if you are sourcing tommorow’s return today–when in fact you are just matching the next day return with today’s signal. Outside of that, I can’t help you out,—you can point it out to the original creator of the spreadsheet who I assume was David from Mind Money Markets.

      best
      david

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