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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 251806  
Subject: Re: Blending at a Whole New Level Date: 7/22/2008 4:11 PM
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Like KBGlenn, I didn't understand your high/low signal construction at first.
But, incomprehension can be good too. This spurred me to try out
several different ways to do this, and they all work to some extent.

All figures using Nasdaq composite 1978-present, both for the highs
and lows and for the trading on those highs and lows.
Signal at close, assuming trading the index that moment at close, no friction.
i.e., not very realistic, but probably OK for signal development if
the number of signals per year is small enough.


EMA of daily high-low number > 0
Bull: 20.8%
Bear: -6.6%
Signals/year 9.62
Bullish 66% of the time


Do two EMA's of the daily high-low number, a longer one and a shorter one.
shorter EMA > longer EMA
Bull: 26.6%
Bear: -5.6%
Signals/year 18.29
Bullish 55% of the time


MACD of high-low number
(take EMA1, EMA2, difference of those, EMA of difference, and check diff>EMA(diff))
Bull: 22.4%
Bear: -8.4%
Signals/year 8.83
Bullish 66% of the time


Trickier one:
Build a high/low line. Start at 0 on day 1. Value on day 2 =
value on day 1 + highs on day 2 - lows on day 2.
Then, create an SMA on that line.
Then, bullish if the high/low line is above SMA(high/low line)
Bull: 20.4%
Bear: -6.0%
Signals/year 8.7
Bullish 67% of the time


And, just for fun, YATS on all the above: take a vote on the sub-signals.
Simply sum the four signals above. If any are bullish be bullish, else bearish.
Bull: 21.3%
Bear: -17.6%
Signals/year 10.0
Bullish 76% of the time

Alternative YATS: bullish if 1 or more of the sub-signals are bullish.
Bull: 22.0%
Bear: -9.7%
Signals/year 9.36
Bullish 68% of the time


And lastly, as above, but with whipsaw reduction to reduce signal count.
If 3 or more of the 4 are bullish today, go bullish.
If 0 are bullish today, go bearish.
Otherwise, stay with previous day's state.
Bull: 22.8%
Bear: -10.5%
Signals/year 6.41
Bullish 67% of the time

Just for interest's sake, here are the last few signals for the last version.
Bullish at close 2006-08-18, Nasdaq at 2163.95
Bearish at close 2007-03-02, 2368
Bullish at close 2007-03-22, 2451.74 (prior bear signal was wrong)
Whipsaw: one day of bearishness triggered at close 2007-06-27, loss .12%
Bearish at close 2007-07-20, 2687.6
Bullish at close 2007-09-04, 2630.24
Bearish at close 2007-10-19, 2725.16
Index now is 2285. Ignoring the one-day whipsaw, that's 5 out of 6 good.
If you could have traded the index with this long & short without friction,
you'd have been up around 46% instead of 5.6% since August 2006.

Here's a little table of how it did by year. This shows the Nasdaq
index return for the year, what fraction of the time the signal was
bullish, the Nasdaq return during the bullish fraction of the year (not annualized),
and the Nasdaq return during the bear periods of the year (not annualized).
Biggest problem is the very poor market performance during bull
periods in 2001 and 2002. The rise in the market during the bearish
period in 1999 is also interesting historically, since market breadth
dropped long before the [megacap] market peaked. If you weren't
in megacaps at that time, it probably was a bear market for you.

Year    Nasdaq    % bull    During bull    During bear
1978 19% 79% 24% -4%
1979 26% 86% 23% 2%
1980 37% 79% 44% -5%
1981 -4% 59% 8% -11%
1982 18% 51% 36% -14%
1983 20% 73% 27% -5%
1984 -11% 34% -3% -9%
1985 32% 91% 34% -1%
1986 9% 64% 11% -2%
1987 -4% 59% 14% -16%
1988 12% 73% 9% 3%
1989 21% 77% 20% 1%
1990 -19% 30% 2% -20%
1991 58% 85% 43% 10%
1992 15% 76% 8% 6%
1993 15% 91% 6% 8%
1994 -4% 50% -5% 2%
1995 42% 93% 26% 13%
1996 21% 78% 16% 4%
1997 23% 72% 9% 13%
1998 40% 59% 41% -1%
1999 87% 69% 54% 21%
2000 -45% 40% 12% -50%
2001 -14% 60% -12% -2%
2002 -30% 54% -18% -14%
2003 45% 86% 39% 4%
2004 7% 80% 10% -2%
2005 4% 72% 0% 5%
2006 8% 75% 8% 0%
2007 8% 62% 8% -1%
2008 YTD -13% 0% N/A -13%


This isn't meant to be a trading signal by itself, but it's nice
to see the degree of consistency of the signal over time, which
is pretty good. I like that you can get quite good results with
surprisingly few signals per year, which I have come to appreciate
is a very important thing in timing signal development.

My only question for Zee: how many signals per year did your example signal produce,
and what percentage of the time was it bullish?

Jim
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