Working with Strategies
1. Use ichimoku()
To create an ichimoku object from the price data.
2a. Simple strategies using strat()
To test a simple strategy with an indicator condition of the form ‘long (or short) while c1 > c2’.
Here ‘c1’ and ‘c2’ are the quoted column names of the ichimoku object representing either candlestick values e.g. ‘close’ or cloud values e.g. ‘tenkan’.
Note: the indicator condition remains of the form c1 > c2 even for short trades. Hence please take care, for example, when inverting ‘long while close > tenkan’ to ‘short while close < tenkan’, this should actually be formulated as ‘short while tenkan > close’.
strat <- strat(cloud, c1 = "cloudB", c2 = "kijun")
print(strat[100:105, ], plot = FALSE)
#> ichimoku [ more() to display more rows | look() to inspect attributes ]
#> object
#> open high low close cd tenkan kijun senkouA senkouB chikou
#> 2020-05-20 122.7 122.7 121.8 122.4 -1 121.05 123.90 125.675 124.85 135.1
#> 2020-05-21 122.4 122.6 121.1 121.9 -1 121.05 123.90 125.675 124.85 135.6
#> 2020-05-22 121.9 123.7 121.7 123.3 1 121.40 123.80 125.675 124.85 134.5
#> 2020-05-25 123.3 124.0 123.0 124.0 1 121.55 123.80 125.675 124.85 134.3
#> 2020-05-26 124.2 124.3 124.0 124.1 -1 121.75 123.65 125.975 124.85 135.9
#> 2020-05-27 124.1 124.1 123.4 123.9 -1 122.25 123.65 126.475 124.85 135.2
#> cloudT cloudB cond posn txn logret slogret
#> 2020-05-20 125.675 124.85 1 1 0 -0.0024479816 -0.0024479816
#> 2020-05-21 125.675 124.85 1 1 0 -0.0040933336 -0.0040933336
#> 2020-05-22 125.675 124.85 1 1 0 0.0114193737 0.0114193737
#> 2020-05-25 125.675 124.85 1 1 0 0.0072727593 0.0072727593
#> 2020-05-26 125.975 124.85 1 1 0 -0.0008054773 -0.0008054773
#> 2020-05-27 126.475 124.85 1 1 0 -0.0016129036 -0.0016129036
#> ret sret
#> 2020-05-20 -0.002444988 -0.002444988
#> 2020-05-21 -0.004084967 -0.004084967
#> 2020-05-22 0.011484824 0.011484824
#> 2020-05-25 0.007299270 0.007299270
#> 2020-05-26 -0.000805153 -0.000805153
#> 2020-05-27 -0.001611604 -0.001611604The use of strat() returns an augmented ichimoku object.
The printout above of a slice of the object (rows 100 to 105) shows that
the following columns are appended:
$cond: ‘1’ if the indicator condition is met at the close of the the time period (note: if the indicator condition involves chikou span, the comparison will be of past periods)$posn: ‘1’ represents that a position is held during this time period (i.e. from the ‘open’ to the ‘close’)$txn: ‘1’ represents a transaction to enter a new position, ‘-1’ represents a transaction to exit an existing position. All transactions are assumed to happen at the ‘open’ of the respective period$logret: the log returns from the ‘open’ price of the period to the ‘open’ price of the next period. For the avoidance of doubt, ‘log returns’ means the natural logarithm of the difference between the prices$slogret: the log returns for the strategy. It is simply logret * posn, i.e. the returns where a position is held$ret: the discrete returns from the ‘open’ price of the period to the ‘open’ price of the next period. For the avoidance of doubt, this is calculated as e raised to the power of ‘logret’ minus 1$sret: the discrete returns for the strategy. It is simply ret * posn, i.e. the returns where a position is held
Note: the following assumptions apply to all strategies:
- confirmation of whether a condition is satisfied is received at the ‘close’ of a particular period
- a transaction is initiated at the immediately following ‘open’
- all transactions are conducted at opening prices
All events are aligned to their correct time periods, which are taken to be from the ‘open’ to the ‘close’ inclusive of that period:
- ‘cond’ refers to if the condition is satisfied at the ‘close’ of the period
- ‘posn’ refers to whether a position is held at the ‘close’ of the period
- ‘txn’ refers to if there has been a transaction during the period (occurring at the ‘open’)
2b. Complex strategies using strat()
Complex strategies can be created by strat() simply by
supplying ‘c3’ and ‘c4’ to the function. These are the quoted column
names of the ichimoku object that form the second part of the indicator
condition.
To create the desired complex strategy, the argument ‘type’ must also be specified. By default this is set to 2, which means the strategy will be a combined strategy formulated as ‘c1 > c2 & c3 > c4’, where both conditions must be satisfied.
If ‘type’ is set to 3, the strategy will be formulated as an asymmetric strategy ‘c1 > c2 x c3 > c4’, where ‘c1 > c2’ is used as a position entry indicator, and ‘c3 > c4’ as a position exit indicator.
- Note: when the strategy is, for example, ‘close > tenkan x tenkan > close’, this is equivalent to the simple strategy ‘close > tenkan’ but not identical due to the strict inequality. In the former, the situation ‘close = tenkan’ does not trigger a position exit but in the latter it does
3. View strategy summary with summary()
A summary of the strategy is saved as an attribute to the ichimoku
object and can be accessed by the summary() method for
ichimoku objects.
summary(strat)
#> [,1]
#> Strategy "cloudB > kijun"
#> --------------------- "----------"
#> Strategy cuml return % 14.09
#> Per period mean ret % 0.0741
#> Periods in market 46
#> Total trades 3
#> Average trade length 15.33
#> Trade success % 100
#> Worst trade ret % 3.4
#> --------------------- "----------"
#> Benchmark cuml ret % 5.53
#> Per period mean ret % 0.0302
#> Periods in market 178
#> --------------------- "----------"
#> Direction "long"
#> Start 2020-04-20
#> End 2020-12-23
#> Ticker "TKR"The summary is designed to provide a quick overview of whether a strategy is effective / desirable:
- Strategy returns are compared with the benchmark, which is simply holidng a position throughout the period
- Comparing returns combined with total periods in the market can help determine if the strategy is substantially different from just taking market risk
- Total trades along with average trade length can be used to filter out undesirable strategies that over-trade
- Trade success % helps to characterise the consistency of the strategy or whether it relies on a small percentage of outsize returns
- The return of the worst-performing trade provides a measure of downside risk
See strategy summary specification for details of the reported measures.
4. Visualize by calling plot() or
iplot().
The periods where the strategy results in a market position are now shaded on the ichimoku cloud chart. The strategy is also printed as the chart subtitle (if not otherwise specified).
To view the original chart without the strategy, simply pass the
argument strat = FALSE when calling plot() or
iplot().
5. Combine strategies using stratcombine()
stratcombine() can be used to create custom combined
strategies from existing strategies contained in ichimoku objects ‘s1’
and ‘s2’ to form ‘s1 & s2’.
strat2 <- strat(cloud, "kijun", "tenkan")
newstrat <- stratcombine(strat, strat2)
summary(newstrat)
#> [,1]
#> Strategy "cloudB > kijun & kijun > tenkan"
#> --------------------- "----------"
#> Strategy cuml return % 11.53
#> Per period mean ret % 0.0613
#> Periods in market 27
#> Total trades 3
#> Average trade length 9
#> Trade success % 100
#> Worst trade ret % 1.78
#> --------------------- "----------"
#> Benchmark cuml ret % 5.53
#> Per period mean ret % 0.0302
#> Periods in market 178
#> --------------------- "----------"
#> Direction "long"
#> Start 2020-04-20
#> End 2020-12-23
#> Ticker "TKR"Note: rather than combining simple strategies using
stratcombine(), it is preferable to supply all 4 arguments
‘c1’, ‘c2’, ‘c3’, and ‘c4’ directly to strat() to generate
a strategy of ‘c1 > c2 & c3 > c4’.
6. Further backtesting and returns analysis
The strategy returns are saved within the ichimoku object in the columns ‘slogret’ (strategy log returns) and ‘sret’ (strategy discrete returns).
The benchmark returns for all periods are saved as ‘logret’ (log returns) and ‘ret’ (discrete returns).
As the ichimoku object inherits the ‘xts’ class, these columns may be fed directly into other econometrics or time series analysis packages such as ‘PerformanceAnalytics’, as per the example below.