Comparison of the profitability of a number of technical trading systems on the ALSI futures contract

Roberts, Harry Hutchinson (2009-12)

Thesis (MBA (Business Management))--University of Stellenbosch, 2009.

Thesis

ENGLISH ABSTRACT: The purpose of this report is to investigate whether the returns of five different trading systems applied is able to outperform the return of a Buy & Hold (B&H) strategy when applied to the Johannesburg Stock Exchange/Financial Times Stock Exchange (JSE/FTSE) Top 40 Index future contract (ALSI). The study starts with an overview of theoretical and empirical studies regarding technical trading systems as well as the application of these technical trading systems in various strategy formats. Five common trading systems were selected for the test. They include the Volatility Channel, the Bollinger Channel Breakout, the Donchian Channel, the Dual Moving Average and the Triple Moving Average systems. The trading systems were applied in three different types of strategies. In the first test the systems were employed using randomly selected parameters to generate trading signals. In the second test the systems were optimised to select the parameters that would yield the most profitable returns over the test period. Finally in the third test a stop loss was added to the systems to investigate whether it would improve returns. In virtually all tests the systems outperformed the B&H approach. This was primarily due to the collapse of world financial markets in 2008 that caused the systems, which are all trend following by nature, to generate large returns. If it had not been for this event, the trend-following systems would all have underperformed the total return generated by the B&H strategy over the duration of the test period. The tests revealed that the selection of the parameters that generate the trade signals for the trading systems can drastically influence the profitability of a trading system. Furthermore the implementation of stop-loss strategies does not necessarily improve the return or drawdown that a system displays, as several of the systems were negatively influenced by the implementation of the stop-loss strategy.

AFRIKAANSE OPSOMMING: Die doel van hierdie verslag is om te ondersoek of die opbrengs van vyf verskillende verhandelingstelsels die opbrengs van die Koop-en-Hou-strategie kan klop soos toegepas op die JSE/FTSE Top 40 Indeks termynkontrak (ALSI). Die studie begin met ’n oorsig oor teoretiese en empiriese studies oor tegniese verhandelingstelsels, asook die toepassing van hierdie tegniese stelsels in verskeie strategiese formate. Vyf algemene verhandelingstelsels is gekies vir die ondersoek, naamlik die Volatiliteitskanaal (Volatility Channel), die Bollinger Kanaal Uitbreek (Bollinger Channel Breakout), die Donchian Kanaal (Donchian Channel), die Tweeledige Bewegende Gemiddelde (Dual Moving Average) en die Drieledige Bewegende Gemiddelde (Triple Moving Average). Die stelsels is op drie verskillende tipes stategieë toegepas. In die eerste toets was die stelsels geïmplementeer deur lukraak gekose parameters te gebruik om verhandelingseine voort te bring. In die tweede toets was die stelsels geoptimaliseer deur die parameters te kies wat die mees winsgewende opbrengs oor die toetsperiode sou voortbring. In die derde toets was ’n staakverlies (stop loss) geïmplementeer om te ondersoek of dit die opbrengs sou verbeter. Feitlik al die toetse het getoon dat die verhandelingstelsels die Koop-en-Hou-benadering geklop het. Aangesien al die stelsels die algemene tendens in die mark volg, het hulle hoë opbrengste getoon hoofsaaklik as gevolg van die beermark wat die wêreld se finansiële markte in 2008 gekenmerk het. As hierdie gebeurtenis nie plaasgevind het nie, sou hierdie stelsels swakker gevaar het as die Koop-en-Hou-strategie gedurende die tydperk van die toetsperiode. Die toetse het aangedui dat die keuse van die parameters wat verhandelingseine vir die stelsels gegenereer het, die winsgewendheid van ’n verhandelingstelsel drasties kan beïnvloed. Die implementering van ’n staakverlies- (stop-loss) strategie verbeter nie noodwendig die opbrengs van ’n stelsel nie, aangesien verskeie stelsels negatief beïnvloed was deur die staakverlies-strategie.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/920
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