Replies to post #107 on Detecting market tops and bottoms

[Vesselin]

Testing the clarified system

I believe your second interpretation is what I had in mind.

I suspect that there is still a bit of misunderstanding, because your next words seemingly contradict the above. :-)

If the Aroon is below -50, the CCI must cross above -200 AND -100 to generate a buy signal. The rule dictates that the CCI must be below -200 (at some point) when the Aroon is in the -50 state. If a signal isn't triggered, and the Aroon moves above -50, the CCI only needs to cross above -100.

See, that's the problem. What does "wait until" mean exactly?

Suppose that today the system is out of the market. You check the AroonOsc. If it is not below -50, things are simple - you Buy if CCI has crossed above -100 and you don't if it hasn't. But what if today AroonOsc is below -50? OK, you check the CCI. If it has not crossed below -200 yet, everything is fine for today - you do nothing.

But what do you do tomorrow? Do you perform exactly the same checks from the start? Or do you, since the AroonOsc has already fallen below -50, only check the CCI from now on and monitor it until it falls below -200 and then rises above -100?

What happens if, while you are waiting for that to happen, AroonOsc moves back above -50? Do you ignore it - or do you then stop monitoring the CCI for falling below -200 first and start again to monitor it for just rising above -100?

I am sorry if I am not expressing myself clearly enough and/or if I am not understanding what you are saying - but please keep in mind that I am not a native English speaker (English is not only not my first language - it's not even my second language) and one needs to understand the rules very precisely, in order to program them correctly in a computer. Computers can't guess what you could have possibly meant - you have to tell them very explicitly what exactly you want done and how.

Since you said that you meant my second interpretation, that's why I have implemented (once the AroonOsc drops below -50, start waiting for the CCI to cross below -200 and then above -100, no matter what the AroonOsc does meanwhile) - but I am still not sure (because of your words above) that this is really what you meant originally.

Cover shorts on any subsequent buy rule.

Very well; I have implemented Short trading rules, too. Also switched to 5% stop-loss.

The system would have been whipsawed using 10% stops. Do more agressive stops (5%) make sense?

The size of the stops doesn't matter, if the problem is that the system keeps trying to buy into downtrends. If you put a large stop, you'll simply lose one big sum of money in one chunk. If you put a small stop, the system will get stopped out much earlier, but it will try to buy almost immediately again - so, you'll lose essentially the same amount of money in multiple consecutive losing trades. The problem has to be fixed by making the system not buy into severe downtrends before they have clearly bottomed - not by adjusting the stop-loss.

The stop-loss has to be adjusted when the system whipsaws. That is, when it enters a trade at the wrong moment, the market goes against it for some time, but after a while reverses and the trade ends up a winner. A too tight stop here is likely to take the system out of the trade too early and at a loss - instead of letting the trade eventually win.

In general, it is a good idea to initially develop a system without stops and make sure that it enters trades at the right moment and exits them at reasonable place, too. Only then you could try to improve the performance by placing stop-losses (provided that the system isn't likely to re-enter the trade almost immediately) and trailing stops (to take profits).

Humor me Vess, can you run the test one more time using the rules I described above?

Certainly, I'm glad to help. Here is what the latest implementation does when trading the COMPX. The performance is better than before - but the percentage of winning trades is much lower, too, and the system trades more often. Exact transcript of the trades follows (thanks to oeo2oo for teaching me how to use pre-formatted text here); the system assumes trading $5,000 positions (i.e., no compounding):

 
 Pos.	Shares	Entry Date	Entry At	Exit Date	Exit At		% Change	Net Profit	Held	Profit/Bar	Buy Sig	Sell Signal	Cum Profit 
 Long	17	16-Oct-1985	  285.70	31-Mar-1987	  427.80	49.33		2,395.72	367	   6.53		Buy	Sell Higher	 2,395.72 
 Long	15	27-Nov-1987	  317.20	03-Dec-1987	  301.34	-5.42		 -257.88	  4	 -64.47		Buy	Stop Loss	 2,137.84 
 Short	16	04-Dec-1987	  295.80	09-Dec-1987	  299.40	-1.64		  -77.58	  3	 -25.86		Short	Cover & Buy	 2,060.26 
 Long	16	09-Dec-1987	  299.40	28-Mar-1988	  369.00	22.83		1,093.62	 75	  14.58			Sell Higher	 3,153.88 
 Long	13	02-Dec-1988	  373.10	27-Feb-1989	  398.40	 6.37		  308.92	 58	   5.33		Buy	Sell Higher	 3,462.80 
 Long	11	09-Nov-1989	  454.70	19-Dec-1989	  431.97	-5.40		 -270.06	 27	 -10.00		Buy	Stop Loss	 3,192.73 
 Long	11	28-Dec-1989	  448.60	24-Jan-1990	  419.90	-6.80		 -335.68	 18	 -18.65		Buy	Stop Loss	 2,857.05 
 Long	11	16-Feb-1990	  430.00	26-Jun-1990	  457.60	 6.00		  283.62	 89	   3.19		Buy	Sell Higher	 3,140.67 
 Short	11	06-Aug-1990	  403.70	23-Oct-1990	  340.40	15.23		  676.32	 55	  12.30		Short	Cover&Buy Lower	 3,816.99 
 Long	14	23-Oct-1990	  340.40	20-Mar-1991	  462.21	35.37		1,685.36	102	  16.52			Sell Higher	 5,502.35 
 Long	 8	10-Apr-1992	  590.59	28-Apr-1992	  561.06	-5.42		 -256.22	 11	 -23.29		Buy	Stop Loss	 5,246.14 
 Long	 8	06-May-1992	  589.86	17-Jun-1992	  560.37	-5.42		 -255.92	 29	  -8.82		Buy	Stop Loss	 4,990.21 
 Long	 8	01-Jul-1992	  563.73	24-Sep-1992	  584.47	 3.24		  145.94	 59	   2.47		Buy	Sell Higher	 5,136.15 
 Long	 7	23-Apr-1993	  661.47	09-Jun-1993	  687.00	 3.43		  158.73	 32	   4.96		Buy	Sell Higher	 5,294.88 
 Long	 6	04-May-1994	  739.38	23-Jun-1994	  702.41	-5.45		 -241.79	 35	  -6.91		Buy	Stop Loss	 5,053.09 
 Short	 7	24-Jun-1994	  699.78	13-Jul-1994	  710.88	-1.99		  -97.68	 12	  -8.14		Short	Cover & Buy	 4,955.41 
 Long	 7	13-Jul-1994	  710.88	23-Sep-1994	  759.88	 6.49		  323.02	 51	   6.33			Sell Higher	 5,278.43 
 Short	 6	25-Nov-1994	  737.22	28-Nov-1994	  743.08	-1.25		  -55.14	  1	 -55.14		Short	Cover & Buy	 5,223.29 
 Long	 6	28-Nov-1994	  743.08	10-Apr-1995	  814.44	 9.16		  408.18	 92	   4.44			Sell Higher	 5,631.47 
 Long	 4	20-Dec-1995	1,032.51	16-Jan-1996	  980.88	-5.48		 -226.48	 17	 -13.32		Buy	Stop Loss	 5,404.99 
 Long	 4	22-Jan-1996	1,019.72	05-Mar-1996	1,084.24	 5.84		  238.10	 30	   7.94		Buy	Sell Higher	 5,643.09 
 Long	 4	05-Aug-1996	1,127.91	24-Sep-1996	1,210.96	 6.92		  312.22	 35	   8.92		Buy	Sell Higher	 5,955.31 
 Long	 4	10-Apr-1997	1,248.31	23-May-1997	1,377.73	 9.97		  497.70	 31	  16.05		Buy	Sell Higher	 6,453.01 
 Long	 3	17-Nov-1997	1,601.95	15-Dec-1997	1,521.85	-5.42		 -260.27	 19	 -13.70		Buy	Stop Loss	 6,192.74 
 Long	 3	31-Dec-1997	1,565.87	12-Jan-1998	1,482.01	-5.78		 -271.56	  7	 -38.79		Buy	Stop Loss	 5,921.18 
 Long	 3	14-Jan-1998	1,549.80	08-Apr-1998	1,801.11	15.79		  733.95	 58	  12.65		Buy	Sell Higher	 6,655.13 
 Long	 2	18-Jun-1998	1,776.35	28-Jul-1998	1,931.83	 8.19		  290.98	 27	  10.78		Buy	Sell Higher	 6,946.11 
 Long	 2	17-Sep-1998	1,646.19	05-Oct-1998	1,563.88	-5.61		 -184.60	 12	 -15.38		Buy	Stop Loss	 6,761.51 
 Long	 3	16-Oct-1998	1,625.24	10-Feb-1999	2,304.25	41.37		2,017.05	 79	  25.53		Buy	Sell Higher	 8,778.56 
 Long	 1	01-May-2000	3,930.18	03-May-2000	3,733.67	-5.51		 -216.49	  2	-108.24		Buy	Stop Loss	 8,562.07 
 Long	 1	08-May-2000	3,758.46	09-May-2000	3,570.54	-5.53		 -207.90	  1	-207.90		Buy	Stop Loss	 8,354.16 
 Long	 1	17-May-2000	3,649.54	19-May-2000	3,467.06	-5.55		 -202.46	  2	-101.23		Buy	Stop Loss	 8,151.71 
 Long	 1	01-Jun-2000	3,471.95	07-Sep-2000	4,047.02	15.99		  555.09	 68	   8.16		Buy	Sell Higher	 8,706.80 
 Short	 1	25-Sep-2000	3,852.53	26-Sep-2000	3,762.65	 1.81		   69.90	  1	  69.90		Short	Cover & Buy	 8,776.70 
 Long	 1	26-Sep-2000	3,762.65	02-Oct-2000	3,574.52	-5.53		 -208.11	  4	 -52.03			Stop Loss	 8,568.58 
 Short	 1	09-Nov-2000	3,174.90	11-Oct-2001	1,649.55	47.41		1,505.37	227	   6.63		Short	Cover&Buy Lower	10,073.96 
 Long	 3	11-Oct-2001	1,649.55	14-Dec-2001	1,945.18	17.52		  866.91	 45	  19.26			Sell Higher	10,940.87 
 Short	 2	20-Feb-2002	1,762.43	04-Mar-2002	1,850.55	-5.57		 -196.22	  8	 -24.53		Short	Stop Loss	10,744.64 
 Long	 2	05-Mar-2002	1,854.71	08-Apr-2002	1,741.10	-6.66		 -247.20	 23	 -10.75		Buy	Stop Loss	10,497.44 
 Long	 2	17-Apr-2002	1,829.58	23-Apr-2002	1,738.10	-5.55		 -202.94	  4	 -50.73		Buy	Stop Loss	10,294.50 
 Short	 2	24-Apr-2002	1,739.13	15-May-2002	1,705.45	 1.36		   47.38	 15	   3.16		Short	Cover & Buy	10,341.88 
 Long	 2	15-May-2002	1,705.45	30-May-2002	1,613.42	-5.98		 -204.04	 10	 -20.40			Stop Loss	10,137.84 
 

I'm not practiced in writing scripts.

Not a problem. Have you tried at least entering the script at the Wealth-Lab Web site? It would allow you to experiment with different indexes and stocks - even if you don't know how to modify the script to change its behaviour.

Anyway, here is the modified WealthScript implementation.

Regards,
Vesselin

 
 const AroonPeriod = 200; 
 const AroonHigh = 50; 
 const AroonLow = -50; 
 const Neutral = 0; 
 const CCIPeriod = 80; 
 const CCILow = -100; 
 const CCILower = -200; 
 const CCIHigh = 100; 
 const CCIHigher = 200; 
 const StopLoss = 5; 
  
 var AroonPane, CCIPane, AroonOsc, MyCCI : integer; 
 var Bar, StartBar, EndBar, BuyState, SellState : integer; 
  
 HideVolume; 
  
 CCIPane := CreatePane(60, False, True); 
 SetPaneMinMax(CCIPane, CCILower - 10, CCIHigher + 10); 
 MyCCI := CCISeries(CCIPeriod); 
 PlotSeries(MyCCI, CCIPane, #Black, #Thick); 
 DrawHorzLine(CCILow,    CCIPane, #Red, #Thin); 
 DrawHorzLine(CCILower,  CCIPane, #Red, #Thick); 
 DrawHorzLine(Neutral,   CCIPane, #Red, #Dotted); 
 DrawHorzLine(CCIHigh,   CCIPane, #Red, #Thin); 
 DrawHorzLine(CCIHigher, CCIPane, #Red, #Thick); 
 DrawLabel(GetDescription(MyCCI), CCIPane); 
  
 AroonPane := CreatePane(60, False, True); 
 SetPaneMinMax(AroonPane, AroonLow - 10, AroonHigh + 10); 
 AroonOsc := SubtractSeries(AroonUpSeries  (#Close, AroonPeriod), 
                            AroonDownSeries(#Close, AroonPeriod)); 
 PlotSeries(AroonOsc, AroonPane, #Black, #Thick); 
 DrawHorzLine(AroonHigh, AroonPane, #Blue,  #Thick); 
 DrawHorzLine(AroonLow,  AroonPane, #Blue,  #Thick); 
 DrawHorzLine(Neutral,   AroonPane, #Black, #Dotted); 
 DrawLabel('Aroon Osc (' + IntToStr(AroonPeriod) + ')', AroonPane); 
  
 InstallStopLoss(StopLoss); 
  
 BuyState := 0; 
 SellState := 0; 
 StartBar := AroonPeriod; 
 EndBar := BarCount - 1; 
  
 for Bar := StartBar to EndBar do 
 begin 
   ApplyAutoStops(Bar); 
   if LastPositionActive then 
   begin 
     if PositionLong(LastPosition) then 
     begin 
       { Long Position Exit Rules } 
       case SellState of 
         0 : 
           if GetSeriesValue(Bar, AroonOsc) < AroonHigh then 
           begin 
             if CrossUnderValue(Bar, MyCCI, CCIHigh) then 
               SellAtMarket(Bar + 1, LastPosition, 'Sell'); 
           end 
           else 
             SellState := 1; { Wait for a crossing above CCIHigher } 
         1 : 
           if CrossOverValue(Bar, MyCCI, CCIHigher) then 
             SellState := 2; { Wait for a crossing below CCIHigh } 
         2 : 
           if CrossUnderValue(Bar, MyCCI, CCIHigh) then 
             SellAtMarket(Bar + 1, LastPosition, 'Sell Higher'); 
       end; 
     end 
     else  { We have a Short position } 
     begin 
       { Short Position Exit Rules } 
       case BuyState of 
         0 : 
           if GetSeriesValue(Bar, AroonOsc) > AroonLow then 
           begin 
             if CrossOverValue(Bar, MyCCI, CCILow) then 
             begin 
               CoverAtMarket(Bar + 1, LastPosition, 'Cover & Buy'); 
               BuyAtMarket(Bar + 1, ''); 
             end; 
           end 
           else 
             BuyState := 1; { Wait for a crossing below CCILower } 
         1 : 
           if CrossUnderValue(Bar, MyCCI, CCILower) then 
             BuyState := 2; { Wait for a crossing above CCILow } 
         2 : 
           if CrossOverValue(Bar, MyCCI, CCILow) then 
           begin 
             CoverAtMarket(Bar + 1, LastPosition, 'Cover&Buy Lower'); 
             BuyAtMarket(Bar + 1, ''); 
             BuyState := 0; 
           end; 
       end; 
     end; 
   end 
   else 
   begin 
     { Long Position Entry Rules } 
     case BuyState of 
       0 : 
         if GetSeriesValue(Bar, AroonOsc) > AroonLow then 
         begin 
           if CrossOverValue(Bar, MyCCI, CCILow) then 
             BuyAtMarket(Bar + 1, 'Buy'); 
         end 
         else 
           BuyState := 1; { Wait for a crossing below CCILower } 
       1 : 
         if CrossUnderValue(Bar, MyCCI, CCILower) then 
           BuyState := 2; { Wait for a crossing above CCILow } 
       2 : 
         if CrossOverValue(Bar, MyCCI, CCILow) then 
         begin 
           BuyAtMarket(Bar + 1, 'Buy Lower'); 
           BuyState := 0; 
         end; 
     end; 
     { Short Position Entry Rules } 
     if (GetSeriesValue(Bar, AroonOsc) < Neutral) and 
        (CrossUnderValue(Bar, MyCCI, CCILow)) then 
       ShortAtMarket(Bar + 1, 'Short'); 
   end; 
 end;