A Study of Trading Strategies: Average True Range

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A Study of Trading Strategies: Average True Range

U0910125L
U0910419G
U0910323K

Supervised by: Professor Low Buen Sin
Applied Research Project submitted to the Nanyang Business School, Nanyang Technological University in partial fulfilment for the degree of Bachelor of Accountancy/Bachelor of Business Academic Year 2011/2012

ACKNOWLEDGEMENTS
We would like to express our deepest appreciation to the following people: Professor Low Buen Sin, for his patience and advice throughout the research process, without which this project would not have been possible. The Staff at Business Library, Nanyang Technological University, who helped us in the data collection process. We would also like to express our gratitude towards everyone who has contributed to the success of this project in one way or another.

TABLE OF CONTENTS
Abstractiii
1.Introduction1
1.1 Background1
1.2 Motivation2
1.3 Preview2
2.Literature Review4
2.1 Technical Analysis4
2.2 Efficient Market Hypothesis5
2.3 Technical Analysis In Singapore6
2.4 Average True Range7
3.Data And Methodology9
3.1 Data Collection9
3.2 The Trading Model11
3.3 Further Considerations And Assumptions17
3.4 Testing Methodology18
4.Data Analysis21
4.1 Test Period (In-Sample Period)21
4.2 Execution Period (Out-Of-Sample Period)25
5.Conclusion29
6.References31
7.Appendix34
Appendix A: Stocks Used In The In-Sample Period34
Appendix B: Analysis Of Stocks For The Out-Of-Sample Period36
Appendix C: Yearly Returns For Atr Strategy41
Appendix D: Yearly Sharpe Ratio For Each Stock46
Appendix E: Tables Of Trade Analysis Results51

ABSTRACT
This research aims to examine the profitability of a trading strategy that utilizes Average True Range (ATR) as a technical indicator. Our strategy is adapted from the model used by Wilcox & Crittenden [2005] and trading is simulated using 104 stocks for two sampling periods, from 2002 to 2006, and from 2007 to 2011. Our results showed that our strategy produced significantly higher returns than the buy-and-hold strategy in the period from 2007 to 2011, but did not produce significantly different returns in the period lasting from 2002 to 2006. As compared to a buy-and-hold strategy, our proposed model may help to reduce losses to a trader when the market is experiencing a downturn, but performs sub-optimally during bullish conditions.

1.
2. INTRODUCTION
1.1 Background
In his book, New Concepts in Technical Trading Systems, published in 1978, J Welles Wilder Jr. introduced several innovative automatic trading systems and technical indicators which made a huge impact on the world of technical analysis. For instance, the Relative Strength Index went on to become one of the most widely used and studied technical indicators [Kirkpatrick and Dahlquist, 2011]. The Parabolic System, Direction Movement and Average True Range (ATR) are concepts that have been widely accepted by technical analysts today in providing valuable information in predicting price movements of stocks, futures and other financial assets. The concept of true range was first conceived in Wilder’s book, under the volatility system. It is used to describe volatility by measuring the maximum range that the price has moved in a period. Using a 7-day average true range and multiplying it by a constant, Wilder devised a trend-following strategy which takes volatility into consideration when identifying trend reversals. ATR has become a popular technical indicator of volatility with many traders, and is used in equities, futures as well as foreign currency markets. Trading systems such as the renowned Turtles [Faith 2003] has incorporated ATR as a component of their rules. Many funds such as Blackstar Funds [Wilcox & Crittenden, 2005] and Tan LeBeau LLC [LeBeau, 2011] have used an exit strategy based on ATR, albeit a variation of the strategy that Wilders...
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