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Ratio of the Short to Long-Term Moving Averages - ETF Trading System
Based on the different iShares ETFs Dow Jones industries, this trading system buys the ETF that is ranked number one based on the ratio between the small-term and long-term moving averages (trending up).
On each rebalance day, the strategy ranks all ETFs based on their moving averages ratio. It then buys the ETF with the highest rank and sells the current position (In case there is a change in the rank of the first ranked ETF).
The higher the ratio between the short-term MA and the long-term MA, the stronger the uptrend is and the lower the ratio, the stronger the downtrend.
The strategy is based on the same logic and formula than the one I have shared yesterday: Industry Rotation Strategy - iShares ETF Dow Jones Stocks.
The difference lies in the formula used to calculate the exchange traded funds ranks and in the fact that I have added a 10% trailing stop with a 20-bar re-entry restriction (Do not buy an ETF for the next 20 bars following the day it was sold because of a trailing stop).
The ETFs that were included in the trading system represent the following industries: Basic Materials Industry (IYM), Consumer Goods (IYK), Consumer Services (IYE), Energy (IYE), Financial (IYF), Health Care (IYH), Industrials (IYJ), Technology (IYW), Telecommunications (IYZ), and Utilities (IDU).
The backtest was conducted on price data for the period 2001-2011 and for the above ETF symbols:
Market Return (as measured by the Down Jones U.S. Index - IYY): 25%
Strategy Return: 194.11%
Annual Return: 11.39%
Maximum Drawdown: -15.74%
Profit Factor: 2.15
Percent Winners: 56.86%
Average Bars Held: 40
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
