To test the author’s DMI stochastic indicator, I used the NASDAQ 100 list of stocks and AIQ’s Portfolio Manager. A long-only trading simulation was run with the following capitalization, cost, and exit settings:
- Maximum of 10 open positions
- Size each position at 10 % of mark-to-market total capital
- Take no more than three new positions per day
- Compute the mark-to-market capital each day
- Three cents per share was deducted for each round-turn trade
- Select trades based on the highest ADX reading
- Exit trades only with a system exit; no loss-stop or profit target stop used.
I coded three similar test systems. The first is the basic system that uses the author’s parameters of 10 (buy signal) and 90 (sell signal) on the DMI stochastic indicator. A stock has a buy signal when it has both a positive DMI oscillator and the DMI stochastic is below the buy level.
In Figure 6, I show the resulting long-only equity curve compared to the S&P 500 index for the basic system with the 10 buy-level parameter. For the period 12/30/1994 to 11/9/2012, the system returned an average internal rate of return of 11.6% with a maximum drawdown of 68.7% on 2/6/2003 and a Sharpe ratio of 0.50.
I also tried increasing the buy-level parameter up to 70, which improved the return somewhat. I added a trend filter using the 50-bar moving average of the S&P 500 index, but it resulted in a reduced return without improving the maximum drawdown very much. The equity curve for this test is not shown. For the period 12/30/1994 to 11/9/2012, this system returned an average internal rate of return of 8.5% with a maximum drawdown of 46.1% on 10/2/1998 and a Sharpe ratio of 0.46.
Finally, I tried adding an ADX filter such that the ADX level had to be above 30 to allow a signal. However, I also left the buy level at the high value of 70. In Figure 7, I show the resulting long-only equity curve for the basic system versus this modified ADX system. For the period 12/30/1994 to 11/9/2012, the system returned an average internal rate of return of 12.1% with a maximum drawdown of 56.1% on 2/6/2003 and a Sharpe ratio of 0.46.
The code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm, and is shown below.
!THE DMI STOCHASTIC !Author: Barbara Star, TASC January 2013 !Coded by: Richard Denning 11/05/12 !www.TradersEdgeSystems.com !INPUTS: wLen is 10. sLen is 3. buyLvl is 70. exitBuyLvl is 0. sellLvl is 55. exitSellLvl is 0. !CODING ABREVIATIONS: H is [high]. L is [low]. C is [close]. C1 is valresult(C,1). H1 is valresult(H,1). L1 is valresult(L,1). ! NOTE: Wilder to expontential averaging the formula is: ! Wilder length * 2 - 1 = exponential averaging length eLen is wLen * 2 - 1. !AVERAGE TRUE RANGE: TR is Max(H-L,max(abs(C1-L),abs(C1-H))). ATR is expAvg(TR,eLen). !+DM -DM CODE: rhigh is (H-H1). rlow is (L1-L). DMplus is iff(rhigh > 0 and rhigh > rlow, rhigh, 0). DMminus is iff(rlow > 0 and rlow >= rhigh, rlow, 0). AvgPlusDM is expAvg(DMplus,eLen). AvgMinusDM is expavg(DMminus,eLen). !DMI CODE: PlusDMI is (AvgPlusDM/ATR)*100. MinusDMI is AvgMinusDM/ATR*100. !DMI OSCILATOR: DMIosc is PlusDMI - MinusDMI. !Plot as historigram !STOCHASTIC OF DMI: HH is highresult(DMIosc,wLen). LL is lowresult(DMIosc,wLen). DMI_STOCH is (DMIosc - LL) / (HH - LL) * 100. DMI_STO_SK is simpleavg(DMI_STOCH,sLen). DMI_STO_SD is simpleavg(DMI_STO_SK,sLen). !Plot with 90/10 lines !SYSTEM TO TEST INDICATOR: !BASIC SYSTEM WITH AUTHOR'S SUGGESTED PARAMETERS: Buy if DMIosc > 0 and DMI_STO_SD <= 10. ExitBuy if DMIosc < 0. Sell if DMIosc < 0 and DMI_STO_SD <= 90. ExitSell if DMIosc > 0. !SYSTEM WITH TREND FILTER AND MODIFIED PARAMETERS (LONG ONLY): SPXc is tickerUDF("SPX",C). SPXma is simpleavg(SPXc,50). BuyT if DMIosc > exitBuyLvl and DMI_STO_SD <= buyLvl and SPXma > valresult(SPXma,10). ExitBuyT if DMIosc < exitBuyLvl or SPXma < valresult(SPXma,10). !SYSTEM WITH TREND STRENGTH FILTER AND MODIFIED PARAMETERS (LONG ONLY): BuyADX if DMIosc > exitBuyLvl and DMI_STO_SD <= buyLvl and ADX > 30. ExitBuyADX if DMIosc < exitBuyLvl. !SIGNAL RANKING( use ADX): ZERO if PlusDMI = 0 and MinusDMI = 0. DIsum is PlusDMI + MinusDMI. DX is iff(ZERO,100,abs(DMIosc)/DIsum*100). ADX is expavg(DX,eLen). List if C > 0.