Introduction TechnicalIndicatorAnalysisonIndustryETFs Duringatwo-month summerinternshipatChinaUniversalAssetManagement,thefundmanageraskedmetodoresearchesonapplicationsoftechnicalindicatorsonthefourIndustryETFs(Medicine,Finance,EnergyandConsumption)ofthecompany.AsaQuantitativeAnalystAssistantIntern,Iworkedonseveraltechnicalindicatorsandtestedtheireffectivenessfromvariousaspects. Andthisisthefinalpresentationofmyproject,whichwasgreatlycomplimentedbythefundmanagerforitsclearness, precisenessandrigorousness.
Part I • Timing of TechnicalIndicatorsonIndustryETFs Part II • PairsTradingStrategyonIndustryETFs
Classification of Popular Indicators ☐ ☐ ☐ ☐ ☐
Winning Chances Test • Data: Industry ETF（15 minutes） • Vertically: for each indicator, choose three long signals and three short signals. Judge the winning chances by seeing the actual trends after the signals. • Horizontally: 5 days, 10 days, 20 days and 50 days • Calculate the actual returns at the end of each period, and then compare it to the pre-determined return standard for each period to see the trends. • The pre-determined return standard is: 2% for 5 days, 3.5% for 10 days, 5% for 20 days and 10% for 50 days. (Note: The result of calculation doesn’t show the real winning chance since it is calculated from only the end of the period.) LongSignals ①②③ 5102050 Duration ShortSignals ①②③
Winning Chance Test: MACD Long Signals: DIFF and DEA are both greater than zero, and DIFF is going up DIFF goes up across DEA from below DIFF goes up above zero Short Signals DIFF and DEA are both smaller than zero, and DIFF is going down DIFF goes down across DEA from above DIFF goes down below zero Long Point 2) Long Point 1) Long Point 3) Short Point 3) Short Point 2) Short Point 1) DIFF DEA
Winning Chance: DMI Long Signals: +DI goes up across –DI from below +DI goes up across –DI from below, and ADX is going up ADX is greater than 50, ADX and stock price are both going up Short Signals: +DI goes down across –DI from above +DI goes down across –DI from above, and ADX is going up ADX is greater than 50, ADX and stock price are both going down Long Point 2) Long Point 1) Long Point 3) 50 50 50 Short Point 3) Short Point 2) Short Point 1) 50 50 50 +DI -DI ADX Stock Price
Winning Chance: KDJ Long Signals: K, D are smaller than 30, and K is going up K goes up across D from below K, D are smaller than 30, and K goes up across D from below Short Signals: K, D are greater than 70, and K is going down K goes down across D from above K, D are greater than 70, and K goes down across D from above Long Point 2) Long Point 1) Long Point 3) 30 30 30 Short Point 3) Short Point 2) Short Point 1) 70 70 70 K线 D线 J线
Winning Chance: BOLL Long Signals: Stock price goes up across mid-line from below Stock price has been above mid-line, and goes up across upper-line Band is getting wider and stock price is going up Short Signals: Stock price goes down across mid-line from above Stock price has been below mid-line, and goes down across lower-line Band is getting wider and stock price is going down Long Point 2) Long Point 1) Long Point 3) 50 50 50 Short Point 3) Short Point 2) Short Point 1) 50 50 50 Upper-line Mid-line Lower-line Stock Price
Winning Chance Conclusion Eliminate vertical comparison elements (The difference between different signals of the same indicator) DMI KDJ
Winning Chance Conclusion • KDJhas the highest winning chance in up-trend tests • DMIhas the highest winning chance in down-trend tests • MACDis stable but lagging • BOLL is unstable and has low winning chances Profit/Loss Ratio Test
Profit/Loss Ratio • Test Standard: • Draw distribution of returns at all signals • Cut 20% of the left tail of the distribution • Take average of all positive returns and negative returns, and then find the ratio of the two means
赔率测试 • NoRegularity,hardtochoose • Closeto1.5,whichisacceptable • Stabledistribution,lowvolatility • GiveWinningChancemorepriority BackTesting
Back Testing Signals Profit/Loss Control KDJ 3%Return KDJ -1%Return
Back Testing- Conclusion • Comparing to others, Medicine ETF has greater amplitude, obvious rises and falls, regular fluctuations, and most importantly, it doesn’t have many continuous rising, falling and sideway markets. These are the very properties that determines its compatibility with technical indicators. • During a sideway or continuous rising market, KDJ is too sensitive to small rebounds and recoveries so that it sends out wrong signals. • During a sideway or continuous rising market, ADX line in DMI is also too sensitive to small changes thus sends out false trading signals. • In addition, when the indicated trends are not strong enough, they may result in losses if they do not reach profit control point. TransactionExamples
PairsTradingonNegative-correlatedIndustryETFs Sell Buy Sell Buy
PriceSpreadIndex Tocapturethelongandshortpointofpairedstocks,herewecalculatethespreadindextimeseries, andthenusethelogfunctiontoamplifyit. Standardizedsinordertoseethepotentialtrendsmoreobviously. where μistheaveragehistoricalvalueofpricespreadand σisitsstandarddeviation. Applytechnicalindicatorsonthestandardizedpricespreadtopredicttrendsofit,andexecutetradingbasedonthesignals.
价差指数 ShortP1 LongP2 ShortP1 LongP2 LongP1 ShortP2 LongP1 ShortP2
Pairs Trading Strategy Update Total Net Asset Long 0.5 Stock 1 Short 0.5 Stock 2 Short 0.5 Stock 1 Long 0.5 Stock 2 Clear position If exceeds profit/loss control If KDJ sends Up-Trend Signal on s Start If DMI sends Down-Trend Signal on s • Iftherealreadyexistsaposition,continueholdingthepositionifitisthesameasthesignalindicates,otherwiseclearandenteranewposition. • Useequallyweightedassetallocation • Transactioncost=0.05%
Conclusion • Thetestresultsshowthattheapplicationoftechnicalindicatorsonpricespreadcanleadtoa50%winningchanceandprofit/lossratioof1.5inthenegative-correlatedpairstradingstrategy. • Thestrategyworksfarbetterinhighlynegative-correlatedstockpairsconsideringmoreapparentspreadtrendsandgreaterprofit/lossratio. • Whentheindicatorssendoutwrongsignals,thatiswhenasignalappearswherenooppositestocktrendoccurs,thelongandshortassetallocationishedgedagainstwrongwayrisks.Sothatthelostwillbeminimized. • ThestrategyseemstobenotcompatiblewithChinesemarketsincethecostofenteringashortpositionistoohighandtheliquidityisbadaswell,thusmaybringdifficultiestothisrelativelyhigh-frequencytradingstrategy. • TechnicalIndicatorsshouldbeconsideredtobereferenceininvestments.Itishardtousepurelyquantitativemethodstogainreturnswithhighprobability.Soinvestmentdecisionsshouldbemadebybothquantitativemethodsandfundamentalresearchesofindustries.