SIGNALS Sample
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OUTLINE Forward I. Backtesting Report Framework a. Parameters & Assumptions b. Technical Analysis Indicators c. Tracking & Performance Metrics II. Top Category Winners a. SPY Benchmark Performance b. Highest Winning Percentage c. Highest Net Overall Return & CAGR d. Average Total Trades & Days In Trade e. Highest Raw Profit Factor f. Highest Calmar Ratio 6 10 11 16 18 21 23 25 26 27 28 29 3
OUTLINE g. Lowest Maximum Drawdown h. Largest Drawdowns by Date Overall i. Highest Sharpe Ratio j. Highest Consecutive Winners/Losers Ratio k. Notable Overall Metrics III. Optimal Settings Directory a. Top Indicator Settings by Performance Metric b. Top 10 Overall by Performance Metric c. Worst 10 Overall by Performance Metric d. Top 10 Settings for Short-Term Traders e. Top 10 Settings for Medium-Term Traders 30 31 32 33 34 35 37 39 40 42 43 4
OUTLINE IV. Real-World Portfolios a. The Option Alpha TOP 5 Indicator Settings b. $10,000 Simulated Portfolio c. $25,000 Simulated Portfolio d. $50,000 Simulated Portfolio e. $100,000 Simulated Portfolio f. $500,000 Simulated Portfolio g. Net Overall Return Performance Heatmaps Afterword About the Author Appendix (See Additional PDF Download on Website) 44 46 47 53 59 65 71 76 78 82 5
FORWARD Do you remember the feeling you had the first time you were introduced to technical analysis or stock charting indicators in general? You were probably at some weekend stock market seminar or watching a video online, and everything just clicked in your mind. The volume signaling that more buyers were present in the market to drive up the price, or the lines showing where support and resistance were; it all just made logical sense. Forget reading reports and company filings digging for great stocks to buy. You finally had the tools you needed to conquer the markets and really start making money. Technical analysis was the "magic" bullet that all the pros were using, and now you were on the inside. It happens to everyone at some point, and you're not alone. "It has to work" you thought, "all the professionals use it! Although technical analysis and stock charting have been around decades, with early candlestick techniques originating in Japan over 100 years ago, the recent popularity and rise of technical indicators have been explosive. Even the largest investment firms and financial media companies on Wall Street are taking notice and publishing their own technical reports and opinions: Momentum oscillators, such as MACD, give retail traders the best opportunity to buy stocks when they are cheap Still, shortly after your introduction to technical analysis, in the back of your head a little voice asked, "Does this stuff really work?" It might have been immediately after your moment of glorious realization, or it could have been days or weeks later, but I guarantee it happened - because it happened to me too. Gold is likely to break above the 200-day moving average and head towards $1,174 per ounce in the next month 6
FORWARD Cisco (CSCO) confirmed it s buy signal today with the STO breakout projecting a move to $28 per share soon And when such persuasive companies are promoting this style of stock analysis, it makes it very hard for the average retail investor like to you to challenges its legitimacy. Yet doesn t it seem fair to ask about the reliability of technical analysis in today s market right? With all the hype around technicals and the money being invested purely based off stock charts and volume indicators, we should know what works or what doesn t. During the initial planning phases leading up to this massive research report, my team and I found many different software services that offered the ability to backtest stocks and indicators one at a time. But in my opinion, everything was too narrow in focus. Nothing I found gave me the ability to split test hundreds of indicator settings, over an extended period with hundreds of different stocks. Therefore, my team and I set out to create the most comprehensive backtesting report imaginable answering the three biggest questions investors had when it came to technical analysis: 1 Is Technical Analysis more reliable than randomly picking a stock s direction? However, there has not been one conclusive report on the reliability and performance of various technical analysis indicators published that we've seen. Not one. So, I decided to finally do the research myself. 2 3 If so, can you generate excess returns above just holding SPY on a consistent basis? If so, what are the specific indicators and settings that work best long-term? 7
FORWARD While I knew it would require an enormous commitment, I also was aware that it would help transform the way hundreds of thousands of investors, just like you, think about technical analysis. Imagine being able to finally know which technical indictors are the most reliable, most consistent and most profitable After 10+ months of backtesting, analyzing more than 17.34 million individual trades, and investing nearly six figures into data, software, and four new employees, I am thrilled to finally present our research. My wish is that this report forever shapes the way you trade and invest in the stock market - for many years to come It s always been a long-time goal of mine to build something that challenges an entire industry and yet moves it forward for the better. I m confident that with this report we are taking a huge first step. Now, before you begin I want to offer a little bit of advice. First, glance quickly at the key parts of the report and sub-chapters again to get an overview of how the material is organized. This will help you to grasp the main ideas before you begin actual reading and mastery of the details. Second, stop at the end of each part and take time to think about backtesting results and how they might fit into your own investing philosophy or trading plan. Finally, review this report periodically. This helps to reaffirm the important concepts and findings in your memory, eliminating anxiety and increasing your investing confidence. Thank you and enjoy your copy of SIGNALS! Kirk N. Du Plessis Founder & Head Trader 8
Technical Analysis Indicators 1. Simple Moving Average (SMA) 2. Exponential Moving Average (EMA) 3. Moving Average Converg/Diverg (MACD) 4. Full Stochastics (STO) 5. Relative Strength Index (RSI) 6. Bollinger Bands (BB) 7. Advance/Decline Volume (ADV) 8. Money Flow Index (MFI) 10. Ultimate Indicator (ULT) 11. On-Balance Volume (OBV) 12. Triple Exp. Moving Average (TRIX) 13. Chande Momentum Oscillator (CMO) 14. Average Directional Index (ADX) 15. Williams Regression (WILL) 16. Aroon Oscillator (ARO) 17. Absolute Price Oscillator (APO) 9. Commodity Channel Index (CCI) 9
Highest Winning Percentage 100% Winner: 94.63% *HIDDEN* Purchase to Unlock Settings: *HIDDEN* 90% 80% Impressively 10 out of the 17 indicators we tested produced at least one setting with a winning percentage greater than 50%. Notably, the highest win rate was *HIDDEN* though not too far behind was *HIDDEN* with a win rate of 91.68%. The worst performing indicators on a winning percentage basis were *HIDDEN* and *HIDDEN*, all posting winning trades less than 40% of the time. As far as overall predictability goes, these would be considered the technical analysis indicators we would avoid long-term as an investor or trader. Win Rate Percentage 70% 60% 50% 40% 30% 20% 10% (0%) Technical Analysis Inidcator 10
Highest Net Overall Return & CAGR 3,000% Winner: 2,788.17% (18.32%) *HIDDEN* Purchase to Unlock Settings: *HIDDEN* 2,750% 2,500% 2,250% The *HIDDEN* indicator was by far the most profitable indicator tested with the highest overall net profit after commissions, on a non-compounded basis. Its annual rate of return just over 18% solidly beat the benchmark index over the last 20 years. Furthermore, the top indicator settings for *HIDDEN* and *HIDDEN* (which can be found in Part III) all produced net overall returns north of 800% with double-digit CAGRs after commissions. We can now conclude that there is a very clear distinction in profitability between certain types of indicator structures as this chart represents. Overall Net Profit 2,000% 1,750% 1,500% 1,250% 1,000% 750% 500% 250% Technical Analysis Inidcator 11
Top 10 Overall by Performance Metric #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 Highest Net Profit % Highest CAGR % Highest Win Rate % Lowest Drawdown % Highest Sharpe Ratio Highest Calmar Ratio Highest Avg Profit % 2,788.17% 18.32% 94.63% -1.01% 0.92 0.39 2,179.35% 2,281.72% 17.19% 91.68% -1.12% 0.89 0.35 2,011.86% 2,243.7% 17.09% 91.55% -1.43% 0.88 0.31 1,900.31% 2,210.54% 17.01% 91.24% -1.47% 0.87 0.31 1,583.83% 2,006.17% 16.47% 85.96% -1.48% 0.86 0.29 1,569.32% 1,967.16% 16.36% 85.51% -1.58% 0.84 0.29 6,04.92% 1,664.83% 15.44% 85.30% -1.68% 0.83 0.29 538.04% 1,631.24% 15.33% 83.96% -1.73% 0.83 0.29 224.02% 1,575.44% 15.14% 83.80% -1.74% 0.83 0.29 222.18% 1,496.45% 14.86% 83.66% -1.83% 0.83 0.28 219.94% *MINIMUM 1,000 TRADES 12
Worst 10 Overall by Performance Metric #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 Lowest Net Profit % CAGR % Lowest Win Rate % Biggest Drawdown % Lowest Sharpe Ratio Lowest Calmar Ratio Lowest Avg Profit % -2,141.42% - 4.30% -2,204.14% -3.03-0.22-2,126.26% -2,085.63% - 5.40% -2,142.52% -2.86-0.22-1,661.73% -1,747.46% - 5.77% -1,790.16% -2.67-0.20-1,650.95% -1,675.05% - 7.01% -1726.85% -2.62-0.19-1,566.36% -1,642.78% - 8.69% -1,709% -2.60-0.19-1,462.11% -1,565.15% - 8.70% -1,610.23% -2.47-0.17-1,342.12% -1,548.27% - 9.24% -1,583.74% -2.41-0.16-1,299.12% -1,292.43% - 9.46% -1,333.55% -2.39-0.16-1,266.85% -1,233.05% - 9.97% -1,256.13% -2.37-0.15-1,204.2% -827.57% - 10.61% -867.90% -2.36-0.15-668.58% *MINIMUM 1,000 TRADES 13
Simulated $10,000 Portfolio, 1% Allocation Per Trade 350,000 *HIDDEN* 300,000 250,000 Total Portfolio Value 200,000 150,000 *HIDDEN* *HIDDEN* 100,000 50,000 *HIDDEN* *HIDDEN* SPY 1/4/95 8/1/96 3/2/98 10/1/99 5/1/01 12/2/02 6/1/04 1/3/06 8/1/07 3/2/09 10/1/10 5/1/12 12/2/13 12/31/14 14