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# Strategy Part 3 - Combined Models

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### Strategy Part 3 - Combined Models

1. 1. Combining Multiple Trading Models – Trend and Counter Trend Markets typically go through cycles of trending and non-trending periods. Ideally at least two separate models traded simultaneously will smooth out the Equity Curve by limiting draw downs. During time periods of consolidation or “side ways” market movements, characterized by less directionality and volatility. A counter trend system will typically profit during the time period where the trend following system does not. Conversely the counter trending strategy will under perform the trend following system during higher directional and volatility time periods. In addition the counter trending model’s performance can be further enhanced by knowing when to “turn off” or ignore the counter trending time periods. There are a variety of very effective filters for markets that are strongly trending. One technique is through regression analysis using linear regression, or least square analysis by calculating the Pearson product-moment correlation coefficient, or Pearson’s R. There are other more reliable techniques available that are incorporated within the quantitative trading models. Figure: Pearson’s R “Trend Strength” Calculation. Determining when a market is trending and when a market is consolidating. This determines the selection of available trading models.
2. 2. Figure: JavaScript Implementation of Pearson’s R calculation
3. 3. Figure: Screen Image with trading signals of “Trend Following” model.
4. 4. Figure: Screen Image of trade signals of “Counter Trend” model.
5. 5. Figure: Side by side comparison of Trend (left) and Counter Trend (right) daily P&L for last two week periods.
6. 6. Notice the largest loosing days on the left trend following column dated 1/22/09 a loss of \$ -1386 was offset by a gain of \$ +2243 in the trend following system. Conversely the largest loosing day for the counter trend strategy was today, 2/04/09 for a loss of \$ - 673 which was offset by a gain of \$1181 in the trend following system. The over all effect is that the loosing day percentage goes from approximately 50 percent to under 25 percent.
7. 7. Figure: February 4, 2009 live trading results combining trend and counter trend following systems.