AMA Strategy Analysis

183 Pages·2015·7.04 MB·English

Trading System Development

An Interactive Qualifying Project
submitted to the Faculty of
WORCESTER POLYTECHNIC INSTITUTE
in partial fulfillment of the requirements for the
degree of Bachelor of Science

by
Attila Kara
Camden Lariviere
Patrick Finn
Olawole Tunde-Lukan
Abstract

The purpose of this IQP is to scientifically develop either a profitable automated trading
system or a profitable manual trading system. To accomplish this, members of the group
researched fundamental concepts and theories about trading and how to develop trading systems.
The members then began to implement techniques and tools to develop the trading systems.
Next, team members scientifically developed their own systems that an ordinary citizen could
follow. The team performed back testing and analyzed the systems through historical data to see
how the systems previously performed. Members allocated funds into each different system
through discussion of the team acting as a hedge fund. The team used data tools to recover the
performance of their different trading systems to give thorough analysis.

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Acknowledgements

The IQP team would like to thank Professors Michael Radzicki and Hossein Hakim for
their insight, guidance, and support throughout the Interactive Qualifying Project. We would also
like to thank Worcester Polytechnic Institute for allowing us the opportunity to work on this
project. Lastly, we would like to thank TradeStation for giving us the privilege to utilize their
services and platform throughout the completion of this project.
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Table of Contents
Abstract ........................................................................................................................................... 1
Acknowledgements ......................................................................................................................... 2
Table of Figures .............................................................................................................................. 5
Introduction ..................................................................................................................................... 9
Background ................................................................................................................................... 10
An Introduction to Asset Classes .............................................................................................. 10
Stocks .................................................................................................................................... 10
Bonds .................................................................................................................................... 11
Options .................................................................................................................................. 12
Forward Contracts and Futures Contract .............................................................................. 13
Currency Pairs ....................................................................................................................... 14
Commodities ......................................................................................................................... 14
Exchange Traded Funds ........................................................................................................ 15
Mutual Funds ........................................................................................................................ 15
Sources of Data/Exchanges ....................................................................................................... 16
Indexes .................................................................................................................................. 16
Exchanges ............................................................................................................................. 19
An Introduction to Trading Platforms....................................................................................... 22
TradeStation .......................................................................................................................... 22
Different Types of Trading/Active Investing Systems ............................................................. 23
Theories................................................................................................................................. 23
Manual Vs. Automated Trading Systems ............................................................................. 27
Fundamental Vs. Technical Trading Systems ...................................................................... 28
Strategies ............................................................................................................................... 29
Strategies ....................................................................................................................................... 34
Strategy Objectives ................................................................................................................... 34
High Winning Percentage ..................................................................................................... 34
High Annual Return .............................................................................................................. 35
Low Draw-Down .................................................................................................................. 35
Robust Across Different Market ........................................................................................... 36
Low Time Commitment ........................................................................................................ 36
Spend a Reasonable Amount of Time in the Market ............................................................ 36
Description of Systems ................................................................................................................. 38
Strategy Terminology ............................................................................................................... 38
Adaptive Moving Average Trading ...................................................................................... 38
Ichimoku Trading.................................................................................................................. 40
Turtle Trading ....................................................................................................................... 42
Volatility Trading.................................................................................................................. 43
Analysis of Systems ...................................................................................................................... 46
Adaptive Moving Average System ........................................................................................... 46
AMA Strategy Analysis- Tesla Motors Inc .......................................................................... 46
AMA Strategy Analysis- IBM INC ...................................................................................... 54
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AMA Strategy Analysis- Nike Inc ........................................................................................ 62
AMA Strategy Analysis- Google Inc Class A ...................................................................... 70
AMA Strategy Analysis- Full Portfolio ................................................................................ 78
Ichimoku System ...................................................................................................................... 86
Ichi Strategy Analysis: USDJPY .......................................................................................... 86
Ichi Strategy Analysis: GBPJPY .......................................................................................... 92
Ichi Strategy Analysis: EURJPY ........................................................................................ 100
Ichi Strategy Analysis: AUDJPY........................................................................................ 107
Ichi Strategy Analysis: Portfolio ......................................................................................... 116
Turtle Trend Following System .............................................................................................. 122
Apple (AAPL) ..................................................................................................................... 122
Amazon (AMZN)................................................................................................................ 130
Google (GOOG).................................................................................................................. 137
Netflix (NFLX) ................................................................................................................... 144
Portfolio .............................................................................................................................. 151
Volatility System .................................................................................................................... 158
System Of Systems Analysis ...................................................................................................... 164
Conclusion .................................................................................................................................. 173
Adaptive Moving Average System ......................................................................................... 173
Ichimoku Trading System ....................................................................................................... 173
Trend Following Turtle System .............................................................................................. 174
Volatility Trading System ....................................................................................................... 174
System Of Systems ................................................................................................................. 175
Works Cited ................................................................................................................................ 176
Appendices .................................................................................................................................. 178
Adaptive Moving Average Code ............................................................................................ 178
Ichimoku Code ........................................................................................................................ 180
Turtle Trading Code ................................................................................................................ 181
Volatility Code ........................................................................................................................ 182

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Table of Figures
Figure 1 Tesla Performance Summary (TSLA) ....................................................................... 46
Figure 2 Monte Carlo Analysis (TSLA) .................................................................................... 47
Figure 3 Monte Carlo Analysis (TSLA) .................................................................................... 48
Figure 4 Monte Carlo Confidence Results (TSLA) ................................................................. 48
Figure 5 “30 Trades Ahead” Monte Carlo Analysis (TSLA) .................................................. 49
Figure 6 “30 Trades Ahead” Monte Carlo Report (TSLA) .................................................... 50
Figure 7 “30 Trades Ahead” Monte Carlo Report (TSLA) .................................................... 50
Figure 8 Optimal Position Size for Net Profit Report (TSLA) ............................................... 51
Figure 9 Optimal Position Size for Net Profit Performance (TSLA) ..................................... 52
Figure 10 Optimal Position Sizing for Rate of Return Report (TSLA) ................................. 53
Figure 11 Optimal Position Sizing for Rate of Return Performance ..................................... 53
Figure 12 Performance Report (IBM) ...................................................................................... 54
Figure 13 Monte Carlo Analysis (IBM) .................................................................................... 55
Figure 14 Monte Carlo Analysis Report (IBM) ....................................................................... 56
Figure 15 Monte Carlo Confidence Levels (IBM) ................................................................... 56
Figure 16 “30 Trades Ahead” Monte Carlo Analysis (IBM) .................................................. 57
Figure 17 “30 Trades Ahead” Monte Carlo Report (IBM).................................................... 58
Figure 18 “30 Trades Ahead” Monte Carlo Report (IBM)..................................................... 58
Figure 19 Optimal Position Sizing for Net Profit Report (IBM) ............................................ 59
Figure 20 Optimal Position Size for Net Profit Performance (IBM) ..................................... 60
Figure 21 Optimal Position Sizing for Rate of Return Report (IBM) ................................... 61
Figure 22 Optimal Position Sizing for Rate of Return Performance (IBM) ......................... 61
Figure 19 Performance Summary (NKE) ................................................................................. 62
Figure 24 Monte Carlo Analysis (NKE).................................................................................... 63
Figure 25 Monte Carlo Report (NKE) ...................................................................................... 64
Figure 26 Monte Carlo Analysis Report (NKE)....................................................................... 64
Figure 27 “30 Trades Ahead” Monte Carlo Analysis (NKE) ................................................. 65
Figure 28 “30 Days Ahead” Monte Carlo Analysis (NKE) ..................................................... 66
Figure 29 “30 Days Ahead Monte Carlo Analysis (NKE) ....................................................... 66
Figure 30 Optimal Position Sizing for Net Profit Report (NKE) ........................................... 67
Figure 31 Net Profit Optimal Position Size Performance (NKE) ........................................... 68
Figure 32 Optimal Position Sizing for Rate of Return Report (NKE) ................................... 69
Figure 33 Optimal Position Sizing for Rate of Return Performance (NKE)......................... 69
Figure 34 Back Testing Performance Report (GOOGL) ........................................................ 70
Figure 35 Monte Carlo Analysis (GOOGL) ............................................................................. 71
Figure 36 Monte Carlo Report (GOOGL) ................................................................................ 72
Figure 37 Monte Carlo Analysis Confidence Levels (GOOGL) ............................................. 72
Figure 38 “30 Trades Ahead” Monte Carlo Analysis (GOOGL) ........................................... 73
Figure 39 “30 Trades Ahead” Monte Carlo Report (GOOGL) ............................................. 74
Figure 40 “30 Trades Ahead” Monte Carlo Report (GOOGL) ............................................. 74
Figure 41 Optimal Position Sizing for Net Profit Report (GOOGL) ..................................... 75
Figure 42 Optimal Position Sizing for Net Profit Performance (GOOGL) ........................... 76
Figure 43 Optimal Position Sizing for Rate of Return Report (GOOGL) ............................ 77
Figure 44 Optimal Position Sizing for Rate of Return Performance (GOOGL) .................. 77
Figure 45 Back Testing Performance Report (Portfolio) ........................................................ 78
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Figure 46 Monte-Carlo Analysis Performance (Portfolio)...................................................... 79
Figure 47 Monte Carlo Analysis Report (Portfolio) ................................................................ 79
Figure 48 Monte Carlo Analysis Report (Portfolio) ................................................................ 80
Figure 49 “30 Trades Ahead” Monte Carlo Performance (Portfolio) ................................... 81
Figure 50 “30 Trades Ahead” Monte Carlo Report (Portfolio) ............................................. 81
Figure 51 ...................................................................................................................................... 82
Figure 52 Optimal Position Size for Net Profit Report (Portfolio) ........................................ 83
Figure 53 Optimal Position Size for Net Profit Performance (Portfolio) .............................. 83
Figure 54 Optimal Position Size for Rate of Return Report (Portfolio) ................................ 84
Figure 55 Optimal Position Size for Rate of Return Performance (Portfolio) ...................... 85
Figure 56- Equity curve of USDJPY ......................................................................................... 86
Figure 57- Monte Carlo analysis of USDJPY ........................................................................... 87
Figure 58- Monte Carlo analysis report USDJPY part 1 ........................................................ 87
Figure 59- Monte Carlo analysis report USDJPY part 2 ........................................................ 88
Figure 60- 30 Predicted future trades for USDJPY ................................................................. 89
Figure 61- 30 Predicted future trade analysis report USDJPY part 1................................... 89
Figure 62- 30 Predicted future trade analysis report: USDJPY part 2 ................................. 90
Figure 63- Position size optimization report for net profit: USDJPY.................................... 91
Figure 64 – Position size optimization for net profit graph: USDJPY................................... 91
Figure 65- Position size optimization report for rate of return: USDJPY ............................ 92
Figure 66- Position size optimization for rate of return graph: USDJPY ............................. 92
Figure 67- Equity curve of GBPJPY ......................................................................................... 93
Figure 68- Monte Carlo analysis for GBPJPY ......................................................................... 94
Figure 69 - Monte Carlo analysis report GBPJPY part 1 ....................................................... 94
Figure 70 - Monte Carlo analysis report GBPJPY part 2 ....................................................... 95
Figure 71- 30 Predicted future trades for GBPJPY ................................................................ 96
Figure 72- 30 Predicted future trade analysis report GBPJPY part 1 .................................. 97
Figure 73- 30 Predicted future trade analysis report GBPJPY part 2 .................................. 97
Figure 74- Position size optimization report for net profit: GBPJPY ................................... 98
Figure 75- Position size optimization for net profit graph: GBPJPY .................................... 98
Figure 76- Position size optimization report for rate of return: GBPJPY ............................ 99
Figure 77- Position size optimization for rate of return graph: GBPJPY ........................... 100
Figure 78- Equity curve of EURJPY ....................................................................................... 100
Figure 79- Monte Carlo analysis for EURJPY....................................................................... 101
Figure 80- Monte Carlo analysis report EURJPY part 1 ..................................................... 102
Figure 81- Monte Carlo analysis report EURJPY part 2 ..................................................... 102
Figure 82- 30 Predicted future trades for EURJPY .............................................................. 104
Figure 83- 30 Predicted future trade analysis report EURJPY part 1 ................................ 104
Figure 84- 30 Predicted future trade analysis report EURJPY part 2 ................................ 105
Figure 85- Position size optimization report for net profit: EURJPY ................................. 106
Figure 86- Position size optimization for net profit graph: EURJPY .................................. 106
Figure 87- Position size optimization report for rate of return: EURJPY .......................... 107
Figure 88- Position size optimization for rate of return: EURJPY ...................................... 107
Figure 89- Equity curve of AUDJPY ...................................................................................... 108
Figure 90- Monte Carlo analysis of AUDJPY ........................................................................ 109
Figure 91- Monte Carlo analysis report AUDJPY part 1 ..................................................... 110
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Figure 92- Monte Carlo analysis report AUDJPY part 2 ..................................................... 110
Figure 93- 30 Predicted future trades for AUDJPY .............................................................. 112
Figure 94- 30 Predicted future trade analysis report AUDJPY part 1 ................................ 112
Figure 95- 30 Predicted future trade analysis report AUDJPY part 2 ................................ 113
Figure 96- Position size optimization report for net profit: AUDJPY ................................. 114
Figure 97- Position size optimization for net profit graph: AUDJPY.................................. 114
Figure 98- Position size optimization report for rate of return: AUDJPY .......................... 115
Figure 99- Position size optimization for rate of return: AUDJPY...................................... 115
Figure 100- Equity curve for Portfolio.................................................................................... 116
Figure 101- Monte Carlo analysis of Portfolio ....................................................................... 117
Figure 102- Monte Carlo analysis report Portfolio part 1 .................................................... 117
Figure 103- Monte Carlo analysis report Portfolio part 2 .................................................... 118
Figure 104- 30 Predicted future trades for Portfolio ............................................................. 119
Figure 105- 30 Predicted future trade analysis report of Portfolio part 1 .......................... 119
Figure 106- 30 Predicted future trade analysis report of Portfolio part 2 .......................... 120
Figure 107-Position size optimization report for net profit: Portfolio ................................. 121
Figure 108- Position size optimization for net profit graph: Portfolio ................................ 121
Figure 109- Position size optimization report for rate of return: Portfolio......................... 121
Figure 110- Position size optimization for rate of return graph: Portfolio ......................... 122
Figure 111: Back-Testing Performance (AAPL) ................................................................... 124
Figure 112: Monte Carlo Performance (AAPL) .................................................................... 124
Figure 113: Monte Carlo Data (AAPL) .................................................................................. 125
Figure 114: Monte Carlo Performance (30 Days In Future) (AAPL).................................. 126
Figure 115: Monte Carlo Data (30 Days in Future) (AAPL) ................................................ 127
Figure 116: 2% of Equity Per Trade (AAPL) ........................................................................ 128
Figure 117: Optimization Performance (AAPL) ................................................................... 129
Figure 118: Net Profit Optimization (AAPL) ......................................................................... 129
Figure 119: Return Rate Optimization (AAPL) .................................................................... 130
Figure 120: Back-Testing Performance (AMZN) .................................................................. 131
Figure 121: Monte Carlo Performance (AMZN) ................................................................... 132
Figure 122: Monte Carlo Data (AMZN) ................................................................................. 132
Figure 123: Monte Carlo Performance (30 Days In Future) (AMZN) ................................ 133
Figure 124: Monte Carlo Data (30 Days in Future) (AMZN) ............................................... 134
Figure 125: 2% of Equity Per Trade (AMZN) ....................................................................... 135
Figure 126: Net Profit Optimization (AMZN) ....................................................................... 136
Figure 127: Optimization for Return Rate (AMZN) ............................................................. 136
Figure 128: Optimization Performance (AMZN) .................................................................. 137
Figure 128: Back-Testing Performance (GOOG) .................................................................. 138
Figure 129: Monte Carlo Performance (GOOG) ................................................................... 138
Figure 130: Monte Carlo Data (GOOG) ................................................................................. 139
Figure 131: Monte Carlo Performance (30 Days In Future) (GOOG) ................................ 140
Figure 132: Monte Carlo Data (30 Days in Future) (GOOG) .............................................. 141
Figure 133: 2% of Equity Per Trade (GOOG) ...................................................................... 142
Table 134: Net Profit Optimization (GOOG) ......................................................................... 143
Table 135: Optimization for Return Rate (GOOG) .............................................................. 143
Figure 136: Optimization Performance (GOOG) .................................................................. 144
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Figure 137: Back-Testing Performance (NFLX) ................................................................... 145
Figure 138: Monte Carlo Performance (NFLX) .................................................................... 145
Figure 139: Monte Carlo Data (NFLX) .................................................................................. 146
Figure 140: Monte Carlo Performance (30 Days In Future) (NFLX).................................. 147
Figure 141: Monte Carlo Data (30 Days in Future) (NFLX) ................................................ 148
Figure 142: 2% of Equity Per Trade (NFLX) ........................................................................ 149
Figure 143: Net Profit Optimization (NFLX) ......................................................................... 150
Figure 144: Optimization for Return Rate (NFLX) .............................................................. 150
Figure 145: Optimization Performance (NFLX) ................................................................... 151
Figure 146: Back-Testing Performance (Portfolio) ............................................................... 152
Figure 147: Monte Carlo Performance (Portfolio) ................................................................ 152
Figure 148: Monte Carlo Results (Portfolio) .......................................................................... 153
Figure 149: Monte Carlo Performance (60 Days In Future) (Portfolio) ............................. 154
Figure 150: Monte Carlo Data (60 Days in Future) (Portfolio) ............................................ 155
Figure 151: Net Profit Optimization (Portfolio) .................................................................... 157
Figure 152: Optimization for Return Rate (Portfolio) .......................................................... 157
Figure 153: Optimization Performance (Portfolio) ............................................................... 158
Figure 154-Equity Curve of GBPCAD ................................................................................... 159
Figure 157-Monte Carlo Analysis Report GBPCAD Part 2 ................................................. 161
Figure 159-30 Predicted future trade analysis report GBPCAD part 1 .............................. 163
Figure 160- 30 Predicted future trade analysis report GBPCAD part 2 ............................. 163
Figure 161- Using 2% of Equity per Trade of GBPCAD ...................................................... 164
Figure 162- Hedge fund equity curve ...................................................................................... 165
Figure 163- Monte Carlo analysis of hedge fund ................................................................... 166
Figure 164- Monte Carlo analysis report part 1 .................................................................... 166
Figure 165- Monte Carlo analysis report part 2 .................................................................... 167
Figure 166- 100 Predicted future trades ................................................................................. 168
Figure 166- 100 Predicted future trade analysis report part 1 ............................................. 169
Figure 167- 100 Predicted future trade analysis report part 2 ............................................. 169
Figure 168- Position size optimization report for net profit ................................................. 170
Figure 169- Position size optimization for net profit graph .................................................. 171
Figure 170- Position size optimization report for rate of return .......................................... 171
Figure 171- Position size optimization for rate of return graph ........................................... 172

8
Introduction
In today’s economy the financial security of every household is of great importance.
Retirement planning and personal growth of wealth have brought to attention many different
options of fund management for individuals to practice. Many people do not take their finances
into their own hands, rather keeping cash stagnant in a savings account or trusting their employer
with correct allocation into various 401K-plan options. Even those entering the free markets take
the risk of allowing a stockbroker to find the profitable trades to make with an individual's funds.
With the emergence of TradeStation and other available online trading platforms, the individual
can enter any free market with total control over their financial future from any place of
convenience. This freedom heightens economic risk yet gives the user a viable source to
personally improve personal wealth and a stable financial future.
The purpose of our Interactive Qualifying Project is to scientifically develop a
consistently profitable automated trading system. In creation of this system, group members
engaged in fundamental research of trading and the free markets. By using scientific analysis and
optimization tools, the group was able to create a portfolio of systems that fulfilled the team’s
goals and proved a positive return on investment. This report discusses the testing processes and
analysis results that shaped our sophisticated system.

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