Quantitative Strategy Research Series One — The Dual Thrust
GAEA Investment Research Center — In this issue, we will present a new series of quantitative research to our readers. This series is created to help our currency friends to face their increasingly specialized currency circle. As we all know, the influence of the currency circle continues to expand as more investors are involved, among them are professionals who have done quantitative research in the financial industry. During a downturn, the number of players who do arbitrage and trade mining will increase. To quote Sun Tzu: “There will be no lost in battle by knowing oneself and others.” Therefore, it is important for investors to understand the quantitative strategies as much as possible, to better understand the market. First, we will begin our journey by understanding the renowned Dual Thrust strategy.
Dual Thrust is a trend tracking system. Trend tracking refers to whether the trend market is generated according to its certain criteria. When the trend is determined, the trend is followed by the order. This strategy was developed by Michael Chalek in the 1980s, which became popular, and was named as one of the most profitable strategies today. Dual Thrust is also a range breakthrough strategy, as it does not depend on any fundamentals, so it can be widely used in markets such as stocks, futures, foreign exchange, and digital currencies.
For all interval breakthrough strategies, the core issue is to define the oscillation range. The Dual Thrust system uses Range = Max (HH-LC, HC-LL) to describe the size of the oscillation interval. Where HH is the highest price of N Day High, LC is the lowest price of N Day Close, HC is the highest price of N Day Close, and LL is the lowest price of N Day Low.
The idea of this strategy is as follows:
1. Determine the parameters:
(1) The highest price of HH on N High Day, the lowest price of LC on N Close Day;
(2) The highest price of HC on N Close day, the lowest price LL of the N Low day;
(3) Range = Max (HH-LC, HC-LL);
(4) UpTrack = Open + Ks*Range;
(5) DownTrack = Open + Kx*Range
2. Design system:
(1) When the price breaks above the upper track, and there is an empty order at that time, it will be flat first and the backhand will open more; if there is no position, it will open directly;
(2) When the price breaks below the lower track, and holds more than one order at the time, it will be flat first and the backhand will be open; if there is no position, it will be opened directly.
The schematic diagram of the strategy is as follows:
Therefore, the reader can determine that the main parameters of this strategy are N, Ks, and Kx.
In order to facilitate the reader to intuitively experience the quantitative strategy, we will make a backtest on the daily line from 0 time on 1st January to 1st July 2018. The data selects the price of BTC on OKex.
Since we don’t know what choices to make for the three parameters, we have optimized the parameters. N is 3~5, step length is 1, Ks and Kx are both 1~2, and the step length is 0.1. After the enumeration calculation, we choose N=4, Ks=1.6, Kx=1.5. See the figure below for details.
After selecting such parameters, the following chart shows the transaction for half a year:
To calculate some data of this backtest, since no leverage is used, the result is:
Cumulative income: 0.284%;
Annualized income: 0.573%;
Sharpe ratio: 0.079;
Annual volatility: 0.073%;
The maximum retracement was 0.169%.
From the results, the effect of this strategy appears to be general, and the Sharpe ratio is not ideal. However, compared with the year-to-date, Bitcoin prices have fallen from the highest at $17,137 at the beginning of the year to about $6,700, a 61% decline, and the biggest decline during the period is 66%. This strategy still holds some significance.
Dual Thrust did not made any additional changes to this backtest, but only moderately optimized the parameters of the original DT strategy. Obviously, this strategy is short, which may not be applicable to some readers.
These are all the strategies that we would like to introduce to our readers today, and readers who are interested can carry out more in-depth mining. We hope that our readers have a better understanding of quantitative investment, thus more countermeasures can be made to deal with complex and complicated market conditions.
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Up next… Quantitative Strategy Research Series 2 — The Grid Strategy!
