An update to the popular post on combining TF and seasonality. To recap:
- Trend Following: Price is above 10 month average (per Faber).
- Seasonality: Average upcoming month return (r) over previous y cycles with m periodicity is above a threshold T.
- Dataset used is Fama-French “Small-Value” portfolio from 1954 to 2014.
AMIBROKER CODE (commented):
RESULTS 1984-2014 (thresholds from 0 to 1%)
EQUITY CURVE (T = 0.8):
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.