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.

Advertisements

7 thoughts on “Trend following + seasonality update

    • The reason is access to a 60 years of survivor-free stock data is difficult to obtain. However, the Fama-French stock selection criteria is simple and transparent and closely matched by available ETFs such as VBR.

      • Hello. Very interesting results. I woulld like to backtest by myself.
        But I don’t understand this rule: “Seasonality: Average upcoming month return (r) over previous y cycles with m periodicity is above a threshold T.” can you explain and give an example?
        Thank you.

      • For example, upcoming month is December. Calculate average return, r, for previous n Decembers. If r > T, Buy on Dec 1.

  1. Pingback: The Whole Street’s Daily Wrap for 6/26/2014 | The Whole Street

  2. Thank you. So, in your example, assuming price is above moving average, if 24month average return of the last 15 periods (you cover 30 years) is greater tan 0.8, then you buy?
    Hace you tested other periodicities and cycles, for posible curve fitting?
    Thank you

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s