Trend following + seasonality update

An update to the popular post on combining TF and seasonality.  To recap:

  1. Trend Following: Price is above 10 month average (per Faber).
  2. Seasonality: Average upcoming month return (r) over previous y cycles with m periodicity is above a threshold T.
  3. Dataset used is Fama-French “Small-Value” portfolio from 1954 to 2014.

AMIBROKER CODE (commented):

TF-Seas4-2

RESULTS 1984-2014 (thresholds from 0 to 1%)

TF-Seas5

EQUITY CURVE (T = 0.8):

seas-EQ

By increasing the threshold, annual return is almost unchanged but the time in market decreases.  For the optimum threshold (0.8%), average monthly return is 2.5% when price is above its 10 month average.

One further improvement that could be made is to normalize by volatility so that the threshold is a function of standard deviation rather than an absolute value.  This would allow better testing across instruments.

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Practically combining trend-following and seasonality

Here is a simple, robust method to combine trend-following and seasonality to achieve high return with low exposure and drawdown.

TREND-FOLLOWING

I use the simple filter from Faber 2007: invest when price is above its 10 month simple moving average.

SEASONALITY

Using bi-annual seasonality from my post series, I require the average return of the upcoming month over the previous 30 years to be greater than a threshold.

PORTFOLIO

I use the “small-value” Fama-French portfolio “value-weighted” from 1984 – 2014 (using 1954 – 1984 for the initial averaging).  This portfolio is not directly investible but funds such as Vanguard’s VBR closely approximate.

RESULTS

Using Amibroker for analysis, the profit distribution is positively skewed:

TF-Seas3

SYSTEM METRICS:

CAR 15%, Exposure 50%, Max. DD 9%

55 trades, average hold: 4 months, 80% winners

Sharpe 1.3, Profit Factor 16

TF-Seas2

TRADE LIST (partial: 1992 – 2014)

TF-Seas1

AMIBROKER CODE

TF-Seas4

Note: the threshold is cumulative over 15 datapoints i.e. a threshold of 15 equates to 1% average return per month.

Seasonality roundup: all timeframes

The complete seasonality series is here, using Fama-French data from 1984-2014.

I Daily: CAR 10% with 25% exposure.

II Annual: CAR 18% with 84% exposure.

III Fama-French factors: Fama-French HML factor over Presidential Cycle.

IV Bi-annual: excluding months 4-7 in even years, 8-10 in odd years.

  • Bi-annual value: CAR 19% with 70% exposure.
  • Bi-annual momentum: CAR 23% with 70% exposure.