Out and About

The Quantum Financier blog will take a pause since I will be away for work, I am leaving Sunday and will return on August 13th and I will most likely be unable to post during this period. Upon my return you can expect the finale for some unfinished series of post.

I will still be available by e-mail if you have questions or suggestions. If you have things you would like me to post on in the future, I encourage you to share the idea with me as I always welcome reader input.

Until next time, have a good summer.
QF

Support Vector Machine RSI System

Better late than never, as promised, the R code for the SVM system discussed in a previous post.

For the record this code is based on the random forest system created by Max Dama. I thought that it would make it easier for common reader to compare and evaluate. I also want to state that this isn’t anywhere close to optimal programming, I did that I long time ago and I was only starting with R at the time.

Here is the system :

SVMClassifModel = function(data, targets, returns, lookback = 252, ktype = "C-svc", crossvalid = 10, C = 10) {
# Construct a predictive model using support vector machine
# Input data must be lagged one period to avoid look-ahead bias
# Print predictions and confidence, accuracy, equity curves plot, and performance statistics v.s. benchmark

# Libraries
require(kernlab)
require(quantmod)

# Make sure targets is a factor (for classification)
targets = as.factor(targets)
data$targets = as.factor(data$targets)

# Generate indexes for backtest
idx = data.frame(targets = lookback:(nrow(data)-1))

# Isolate index to be used later
inx = index(returns[idx$targets])

# Prediction function to be used for backtesting
pred1pd = function(t) {
# Train model
model = trainSVM(data[(t-lookback):t, ], ktype, C, crossvalid)
# Prediction
pred = predict(model, data[t+1, -1], type="prob")
# Print for user inspection
print(pred)
}

# backtest by looping over the calendar previously generated
preds = sapply(idx$targets, pred1pd)
# print output
print(preds)
print(max.col(preds))
preds = data.frame(t(rbind(mle = max.col(t(preds)), preds)))
print(preds)
print(summaryStats((returns[idx$targets] * (preds$mle*2-3)), returns[idx$targets], comp = TRUE))

#Equity curves
equity = xts(cumprod((returns[idx$targets] * (preds$mle*2-3))+1), inx)
Benchmark = xts(cumprod(returns[idx$targets] + 1), inx)

# y axis values range
yrngMin = abs(min(equity, Benchmark))
yrngMax = abs(max(equity, Benchmark))

# Plot curves
chartSeries(equity, log.scale = TRUE, name='Equity Curves', yrange=c(yrngMin, yrngMax))
addTA(Benchmark, on=1, col='gold')
}

trainSVM = function(data, ktype, C, crossvalid) {
# Return a trained svm model
trainedmodel = ksvm(targets ~ ., data = data, type = ktype, kernel="rbfdot", kpar=list(sigma=0.05), C = C, prob.model = TRUE, cross = crossvalid)
}

featureGen = function(sym, returns) {
# Return a data frame to be used as input by the SVM system

# Targets vector
targets = coredata(returns)
targets[targets>=0] = 1
targets[targets<0] = -1
targets = as.factor(targets)

#RSIs
rsi2 = RSI(Cl(sym), 2 )
rsi3 = RSI(Cl(sym), 3 )
rsi4 = RSI(Cl(sym), 4 )
rsi5 = RSI(Cl(sym), 5 )
rsi6 = RSI(Cl(sym), 6 )
rsi7 = RSI(Cl(sym), 7 )
rsi8 = RSI(Cl(sym), 8 )
rsi9 = RSI(Cl(sym), 9 )
rsi10 = RSI(Cl(sym), 10 )
rsi11 = RSI(Cl(sym), 11 )
rsi12 = RSI(Cl(sym), 12 )
rsi13 = RSI(Cl(sym), 13 )
rsi14 = RSI(Cl(sym), 14 )
rsi15 = RSI(Cl(sym), 15 )
rsi16 = RSI(Cl(sym), 16 )
rsi17 = RSI(Cl(sym), 17 )
rsi18 = RSI(Cl(sym), 18 )
rsi19 = RSI(Cl(sym), 19 )
rsi20 = RSI(Cl(sym), 20 )
rsi21 = RSI(Cl(sym), 21 )
rsi22 = RSI(Cl(sym), 22 )
rsi23 = RSI(Cl(sym), 23 )
rsi24 = RSI(Cl(sym), 24 )
rsi25 = RSI(Cl(sym), 25 )
rsi26 = RSI(Cl(sym), 26 )
rsi27 = RSI(Cl(sym), 27 )
rsi28 = RSI(Cl(sym), 28 )
rsi29 = RSI(Cl(sym), 29 )
rsi30 = RSI(Cl(sym), 30 )

# lagged RSIs to correspond RSI with target period
rsi2 = Lag(rsi2, 1)
rsi3 = Lag(rsi3, 1)
rsi4 = Lag(rsi4, 1)
rsi5 = Lag(rsi5, 1)
rsi6 = Lag(rsi6, 1)
rsi7 = Lag(rsi7, 1)
rsi8 = Lag(rsi8, 1)
rsi9 = Lag(rsi9, 1)
rsi10 = Lag(rsi10, 1)
rsi11 = Lag(rsi11, 1)
rsi12 = Lag(rsi12, 1)
rsi13 = Lag(rsi13, 1)
rsi14 = Lag(rsi14, 1)
rsi15 = Lag(rsi15, 1)
rsi16 = Lag(rsi16, 1)
rsi17 = Lag(rsi17, 1)
rsi18 = Lag(rsi18, 1)
rsi19 = Lag(rsi19, 1)
rsi20 = Lag(rsi20, 1)
rsi21 = Lag(rsi21, 1)
rsi22 = Lag(rsi22, 1)
rsi23 = Lag(rsi23, 1)
rsi24 = Lag(rsi24, 1)
rsi25 = Lag(rsi25, 1)
rsi26 = Lag(rsi26, 1)
rsi27 = Lag(rsi27, 1)
rsi28 = Lag(rsi28, 1)
rsi29 = Lag(rsi29, 1)
rsi30 = Lag(rsi30, 1)

# Data frame
data = data.frame(targets, rsi2, rsi3, rsi4, rsi5, rsi6, rsi7, rsi8, rsi9, rsi10, rsi11, rsi12, rsi13, rsi14, rsi15, rsi16, rsi17, rsi18, rsi19, rsi20, rsi21, rsi22, rsi23, rsi24, rsi25, rsi26, rsi27, rsi28, rsi29, rsi30)
# names(data) = c("targets", "data")

# Results
return(data)
}

summaryStats = function(x, bmk, comp = FALSE) {
#Required library
require(PerformanceAnalytics)

#Compute stats of interest for strategy
cumRetx = Return.cumulative(x)
annRetx = Return.annualized(x, scale=252)
sharpex = SharpeRatio.annualized(x, scale=252)
winpctx = length(x[x > 0])/length(x[x != 0])
annSDx = sd.annualized(x, scale=252)
maxDDx = maxDrawdown(x)
avDDx = mean(Drawdowns(x))

if(comp == TRUE) {
#Compute stats of interest for benchmark
cumRetbmk = Return.cumulative(bmk)
annRetbmk = Return.annualized(bmk, scale=252)
sharpebmk = SharpeRatio.annualized(bmk, scale=252)
winpctbmk = length(bmk[bmk > 0])/length(bmk)
annSDbmk = sd.annualized(bmk, scale=252)
maxDDbmk = maxDrawdown(bmk)
avDDbmk = mean(Drawdowns(bmk))
#Return result vectors
Benchmark = c(cumRetbmk, annRetbmk, sharpebmk, winpctbmk, annSDbmk, maxDDbmk, avDDbmk)
Strategy = c(cumRetx, annRetx, sharpex, winpctx, annSDx, maxDDx, avDDx)
nms = c("Cumulative Return", "Annualized Return", "Annualized Sharpe Ratio", "Winning Percentage", "Annualized Volatility", "Maximum Drawdown", "Average Drawdown")
result = data.frame(Strategy, Benchmark, row.names = nms)
} else {
#Return result vectors
nms = c("Cumulative Return", "Annualized Return", "Annualized Sharpe Ratio", "Winning Percentage", "Annualized Volatility", "Maximum Drawdown", "Average Drawdown")
Strategy = c(cumRetx, annRetx, sharpex, winpctx, annSDx, maxDDx, avDDx)
result = data.frame(Strategy, row.names = nms)
}
return(result)
}

Here is the harness used to use the system. Don’t forget to change the first two line of the code and replace with your directory.

For example:
setwd(“C:\Users\John Doe\Documents”)
source(“SVM System”)

setwd("INPUT DIRECTORY")
source("NAME OF THE RSI SYSTEM FILE IN THE FOLDER")
require(quantmod)
require(PerformanceAnalytics)

# Load data with quantmod
getSymbols('SPY', from='2000-06-01')
returns = dailyReturn(Cl(SPY), type='log')

# Generate data frame of data and targets
data = featureGen(SPY, returns)
targets = coredata(returns)
targets[targets>=0] = 1
targets[targets<0] = -1
targets = as.factor(targets)

# Run the system
SVMClassifModel(data[30:nrow(data),], targets[30:length(targets)], returns, lookback = 252, ktype = "C-svc", crossvalid = 10, C = 60)

Lastly I would like to know if anyone has a better idea to share code. This is not very good way and I would like to improve it. I also welcome suggestions to make the code more efficient. I also want to make clear that I do not think that this is a good system and I know that it could be improved by adding predictors and all, it is only to give an example to follow-up on the post mentioned above.

QF

Normalized Price Spread Strategy

Here is a quick idea I had the other day. I was reading about statistical arbitrage and pair trading and as some of you may know, the notion of spread is quite central in the domain. The idea behind pair trading is somewhat simple; find assets exhibiting similar behavior, then when the spread depart from the mean bet on the subsequent return to normal. Simple, elegant and based on sheer intuition, everything I like in a trading concept.

I looked at ways to incorporate the concept in a simple system. This strategy looks at the normalized spread (difference) between the closing price and a short-term moving average (for this example 3 days). In other words, I use the percentrank function on the difference between the last closing price and the 3 day moving average of a single asset. Enter long if < 50th percentile, short otherwise. The results on SPY since 2000 are presented below.

Conceptually this makes a lot of sense. If the recent price exhibit strong relative strength we expect it to return to normal, the opposite holds true for weak relative strength. Normalizing the spread give use an indication of the degree to which the recent price departs from the past couple days and from there we can expect a given degree of reversion to the mean. If the price becomes “stretched” I would be more confident than if the price was range bound around the mean. That being said, this idea has nothing genius about it; it is yet another relative strength strategy and is very similar to the well known z-score. However, I like that by using the percentile we do not have to assume any distribution thus relaxing the need for normality in the data. It also facilitates the creation of a confidence based bet scheme or a “dimmer approach” à la MarketSci. Regardless, I think that the concept of spread is a good concept, expect it to come back on the blog as I learn more about it.

QF

SVM Classification using RSI from Various Lengths

First of all, I want to apologize for the lack of posting on the blog these days. I have been insanely busy with work (still am) and had trouble squeezing full posts in.

Today, I thought I would follow up on the previous post on SVM learning. In this post I did exactly what I talked about in the post; the only input in the system is the RSI values for lengths 2 to 30 days associated with their respective results (up vs. down). The SVM algorithm is from the R package kernlab, and the parameters for the SVM itself are nu = 0.2, and C = 10. Those are arbitrarily chosen and absolutely no optimization has been performed, the idea being only to give an example. Furthermore, I by no means suggest that this is the best setup or anything of the sort, I thought this would be a good example since it was previously discussed on the blog. Anyhow, here are the equity curves and some numbers compared to classic MR with RSI 2 50/50 as a proxy and buy and hold.

Just eyeballing the chart, one can see that the SVM strategy adapt better to the the presence of a trend and outperform RSI 2 during the bull market, it also adapted fairly well to the recent turmoil, performing slightly worse than the short term MR strategy. I plan to share some code but don’t want to clutter the blog with lines and lines of code, so once I figure out the best way to do this, (I am thinking a downloadable file or something like it) I will proceed. Finally, if readers have played around with SVM I welcome suggestions and comments as always !

QF