Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

SOME COMPARISONS

Bollinger Band System and the Three Moving Average Ichimoku

Although a glance at the total net profit column might suggest the three moving average Ichimoku crossover (Table 3.5) was the superior performer, this conclusion is incorrect. While it is true that our Bollinger band system (Table 3.10) produced only a total net profit of $107,396 versus $153,229 for the three moving average Ichimoku, this does not tell the whole story.

Assuming $200,000 equity under management, the three moving average Ichimoku enjoyed an average annualized return on investment of 7.66 percent with a 25.46 percent worst drawdown. By contrast, based on the same assumptions, the Bollinger Band system would have experienced a similar 5.37 percent average annualized rate of return while enduring almost 50 percent less risk (its maximum drawdown was 14.16 percent). In other words, if we examine total net profit in relation to the risks endured to achieve those profits, Bollinger Bands were the better performer. This is illustrated by its superior profit to maximum drawdown (P:MD) ratio of 3.79 percent versus 3.01 percent for the three moving average Ichimoku.

This comparison shows the importance of not analyzing total net profit in a vacuum. By itself, this measure is meaningless. It must always be viewed in relation to maximum drawdown to gauge reward in relation to risk. Moreover, although its results were inferior to the three moving average crossover in terms of total net profit, the ...