Category Archives: ROC Indicator
I last wrote about the ROC Indicator on August 3rd: ROC Indicator Has Been Cleared for Liftoff.
Indeud, it did liftoff and has stayed elevated since August. This means the very simple system that trades the indicator (read much more about it here) has stayed long since August.
We are looking at the bottom pane. As you can see, the indicator never really got close to switching to a short position.
For the year, trading both long and short, the indicator applied to $SPY has generated a net profit of 18.84%.
I am trading this system in order to get some long-term trendfollowing type exposure in my account. It doesn’t typically whipsaw back and forth long/short as it did for the first half of 2012. Usually once the ROC252 gets well above the ROC5 (blue and red lines, respectively), the market has embarked on a long-term trend.
After a year of whipsaw, this long-term trend indicator may finally be cleared for lift off.
The blue line is the 252 day rate-of-change and the red line is the 5 day rate-of-change. The ROC252 has not seen this level since July 2011. While it certainly could start trending back downwards and resume the whipsaw, past history shows that it spends most of its time above the red line.
Going long and short, but not including commissions and slippage, the ROC indicator when applied to $SPY has produced gains of 15.49% year-to-date.
And now I must finish packing to meet The Fly, Chess, Cajun, Thaler, Gap&Yap, Jeremy, and all the other iBC crew in NYC.
The ROC indicator has been doing well of late, which has of course generated some reader interest. I’ve ran various backtests of the indicator and will dump the statistics into this post.
Michael Stokes of MarketSci wrote a helpful piece about this indicator: Woodshedder’s Long-Term Indicator.
ROC means rate-of-change.
The ROC indicator works by going long when the ROC252 (252 day ROC) has been above the ROC5 (5 day ROC) for one day and will again close above the ROC5 and going short when the ROC5 has been above the ROC252 for one day and will again close above the ROC252.
All trades are made at the close and the account is assumed to have started with $10,000.
From 1.1.1994 – 7.14.2012
Equity Curve and Drawdowns:
Okay, so the indicator has done well in backtesting. How about in real-time?
I first wrote about this indicator on August 28th, 2011. Let’s see how it has performed in out-of-sample, real-time performance since that date.
From 8.29.2011 – 7.14.2012
Equity Curve and Drawdowns:
Real-time results show a net gain of 15.93%, which is annualized at 18.42%. Note that the short side has resulted in a negative average trade.
While the indicator is designed to catch long-term trends (note in the stats that a few LARGE winners provide the bulk of the gains), the indicator has been handling the whipsaws of the past year quite well.
A SPY buy-n-hold since 8.29.11 has yield a net profit of 11.86% and a max drawdown of -10.01%. The ROC indicator, in out-of-sample performance has yielded almost 4% more than buy-n-hold with a slightly lower maximum drawdown.
If we make the system long-only, real-time performance is even better.
Some of you have asked how the indicator works with individual stocks. I’ll look at that next. I will be happy to entertain any other questions in the comments section.
This simple indicator continues to handle the year’s whipsaws quite well. Trading SPY with the indicator has resulted in a year-to-date net gain of 10.16% while a buy and hold of SPY has yielded a gain of only 6.23%.
The indicator signaled short at the close on July 3rd, effectively shorting exactly at the recent high.
Because it was designed with a much longer time horizon, I’m still not sure how well the indicator will handle all this whipsawing. So far, so good.
To read more about this indicator, there are many posts on it housed here.
This long-term indicator has flashed a warning signal. A lower close tomorrow may take the warning signal off the board. A higher close will trigger the closing of the open long position and the opening of a short position.
A long entry is triggered at the close on the second day the blue line closes above the red line. A short signal is triggered on the second day the red line closes above the blue line. The red and green arrows show the short and long entries.
The indicator is not designed for short-term swing trading, although it made a few attempts at that early in 2012. It is designed to catch long trends.
To illustrate how it catches trends and quickly abandons a position if it doesn’t trend, consider these statistics:
Trading SPY, the ROC system has generated a compound annual return of 11.18% with a maximum system drawdown of -20.27%. Buying and holding SPY during the same time period (all SPY history) has generated a compound annual return of 5.89% with a maximum drawdown of -56.45%.
Read just about everything else I’ve written about this indicator here.
This indicator, designed to delineate the long-term trend, may have finally escaped months of whip-saw action.
Note that the blue line (ROC252) is elevated farther above the red line (ROC5) than it has been in over 7 months.
Backtesting this indicator over all SPY history returns an annualized gain of 11.56%. If traded long only, it returns an annualized gain of 9.13% with a maximum drawdown of -19%.
Below is the equity curve of the indicator trading only the long signals.
It may be hard to believe, but we could be witnessing the start of a long bull market.
Starting to get some distance between the ROC252 and ROC5.
The system is down -0.5% for 2012. Not great, but remember this was started as a long-term trend following method. Watching it handle lots of whip-sawing and volatility in real-time has been interesting…
Still, if the ROC252 can manage to stay above the ROC5 during the next pullback, we may be seeing the emergence of a long-term trend signal on the long side. I’m not saying the signal will be correct. But it’s the first one that’s emerged since November 2011.