Following identification of a robust market anomaly (momentum), a set of rules is defined and tested:
This strategy will be “long only” (i.e. no shorting) and trade on a weekly basis.
Buying is at the weekly closing price when percentage of stocks up 25% in one month exceeds percentage of stocks down 25% in one month:
(in Amibroker code):
Buy = Cross (25%u, 25%d);
And vice versa for sell:
Sell = Cross (25%d, 25%u);
Various momentum ranking methods will be tested, the Amibroker ranking term is “Positionscore”:
- Annual rate of price change, ROC (C,52)
- Worden TI42, C / MA (C,8) [i.e. 8 week moving average or 42 trading days]
- Price change from annual low, MA (C,4) / LLV (C,52)
All available cash is used to buy the top ranked fund from the universe. No stop losses are set.
(click to enlarge)
The strategy performs well in bull markets, treads sideways in bear markets (2002, 2008) and has struggled since mid 2011.
The chart below shows breadth in the lower pane, market prices with green BUY markers and an equity curve (green denotes holding cash i.e. no current trade).