How to calculate the profitability of stock indicators?
Stock market. Knowledge cut
I meet people on a daily basis who use indicatorsand blindly believe them, but don't know their profitability. Why should they? They have been taught on courses how to see the signal, and they act like robots.
For me, this attitude to an account is akin to giving money to a person for some business without knowing anything about it, and without even asking him what profit can be made from this event. Moreover, no one explains the prospects and essence of this business, they just ask for money for beautiful eyes. In trading, of course, you will not immediately understand, but in life, I hope you never do this.
Other articles of the course "Stock Market. Knowledge cut"
- Indicator periods: selection of operating parameters
- Checking our homework on indicators: EMAs on Russian stocks
- Exchange "barometers": from general to specific
- Diamond or Rhombus pattern: a dangerous signal for a trader
Calculating profit and loss of indicators
We have already dealt with the fact that it is not a bad idea to know the number of trading signals per month, week, day for your paper and your time frame (see previous article). Now I will give an example of how to analyze the yield.
Let's calculate how much money could be made on Sberbank shares, for example, over the last couple of years on a primitive but popular strategy based on two moving averages included in the classic MACD indicator (12, 26, 9). The main signal will be the crossover of moving averages above and below the price without the conventions that books give us regarding which moving average should be the first to cross the track. If our averages cross above the price, we conditionally sell, and under the price, we buy.
Let's calculate how effective this strategy will be if we play only on the upside and if we use a short position.
And first of all, let's find out how much money could be made with positional trading, i.e. on a "buy and hold" strategy for the selected period. This is a must! After all, it may turn out that in order to catch a profit, it was not necessary to complicate matters with indicators, but it was enough to be patient. So, 2011 securities "Sberbank" closed at 82.4 rubles, on October 4, 2013 (the date of our study) shares cost at the end of the day 100.25 rubles, respectively, the profit of position trading 21.66%. That is, the invested 100,000 rubles could turn into 121,660 rubles. With this strategy, we would have had to experience a paper loss of just over 6% and look at a paper profit of 38%.
Let's move on to the results for the strategy on the MACD indicator (12, 26, 9).
For the same period the indicator would give a negative result if you use its signals for both "short" and "long". The losses could have amounted to as much as 24.5%. To this we should also add fees for the use of borrowed funds for "shorts".
If you would use sell signals only to close "longs", the losses would be about 6.76%. If we would use only signals for "shorting", then the loss would be 20,14%.
Trying to refine the strategy
Disgusting? Shocking? How so, because it is the favorite indicator of many!!!
It is impossible to write off the indicator. Once again, before judging it, it is necessary to study the whole history. We have taken a small segment in order to save time. Nevertheless, it tells us that The trader did not tolerate losses on this strategy along the wayand several times he lost only a fraction of his profits.
If a detailed review of the strategy over the entire history shows similar results, before looking for new variants of indicator periods, try refine this strategy.
Among other calculations, let's estimate what would be the result if we use it to catch market bottoms and peaks.
Let's start with the bad: if the market circumstances are such that the trader has to close on the maximum negative price deviations, then at the end of 16 trades he will could have lost 48,41% of his account.. But this is if we look at the new knowledge negatively, if it is perceived through the prism of benefits for us. We now know that if after the signal the price deviates from the level of opening a deal in the negative side by 4.03% on average, then the market goes beyond a certain norm. And this deviation can foreshadow systemic crisis.
If you try to exit at the maximum values of the indicator, you should note the moments when after the indicator signal the quotes pass 7.07% in your direction. This strategy could lead to the result in 186% during the period in question.
Your homework:
- Calculate the performance of the MACD indicator (12, 26, 9) on your time frame and the entire history of the papers.
- Calculate the profitability if you try to drag a position from the bottom to the peak. This is dangerous in practice, but we need it in order to develop a system of "stop-losses" and "take-profits".
- For peace of mind, read up on the average number of days from signal to signal (there are inputs in the tables).
If you are too lazy to do it, remove this indicator from your charts. You can't handle it. I hope I have inspired you. Good luck with your calculations!