The Opportunity
I was fortunate enough to be asked to present EdgeRater at the semi-annual HGSI seminar in Palos Verdes, LA. The seminar is a 3 day event where Ron Brown and Ian Woodward present market analysis and techniques for using HGSI (an excellent trading tool BTW). On day 2 I had the hour before lunch to demo EdgeRater. I chose to demo a technique where HGSI and EdgeRater can be used together to get a really powerful combination of tools.
Backtesting
The technique I used was to backtest a list of stocks that had been picked out by HGSI back in June. HGSI is great at analyzing current market conditions and ranking stocks based on fundamental and technical characteristics. I used a list that HGSI had generated back in June consisting of ‘leaders’ – stocks that showed great strength both fundamentally and technically. I loaded that list into EdgeRater and created a snapshot of data containing those leaders, with data going back 2 years just to ensure that the technical analysis functions had enough data to start producing values the day after the list was generated in June.
Force Index
Ron had been discussing the applications of Alexander Elder’s Force Index with the attendees the day before my presentation and so I wanted to see if there was a statistical edge in using a Force Index pullback entry on that group of stocks during the period of time after the list was generated to present day.
I constructed a Force Index pullback script for EdgeRater, and then ran that over the list of June’s leaders from June to the day prior to the seminar, picking out every pullback event in the list during that period of time. I then looked at the statistics to see if over a 1 bar, 2 bar, 3 bar … 10 bar period a long entry would have produced better results than just buying the average of all the stocks in the list and holding them for the same number of periods.
Results
The results were quite interesting. It turned out that the only hold period that performed better than buying the average was a 1 bar hold – meaning to purchase the stock on the open the day after the Force Index pullback event was generated, and selling it on the close of that same day. All other hold periods performed worse than average, potentially indicating that there is an edge in shorting those events.
Conclusion
The idea would need more investigation – I only conceived of it the evening prior to my talk after watching Ron’s presentation. My selector was also very basic and detects the condition of 13 period Force Index being positive whilst the 2 period Force Index crossed from negative to positive, indicating a longer term bullish condition and a pullback and resumption of a short term bullish indicator.
This is just one idea that you could take further with EdgeRater analysis, perhaps using a group of stocks from an index rather than being fundamentally generated, and perhaps honing in on the conditions for a better percentage gain overall.