Effect of Exits and Portfolio Strategies on Equity Curves

All the decisions you make about entries, exits, and stops show up in the slope and smoothness of the equity curve. In this section we will explore the equity curves of the 65sma-3cc model using a deutsche mark actual contract with rollovers. We will study how the equity curve responds to changes in system design. Our yardstick for comparison will be the standard error calculations described in the previous section. We will not test continuous contracts, because the actual contracts with rollovers provide a better simulation. Besides, the System Writer Plus™ software from Omega Research can be used here to develop detailed equity curves.

The test set includes actual deutsche mark contracts from March 1988 through September 1995. We allowed $100 for slippage and com­missions, and the software automatically rolled over the contracts on the 20th day of the month preceding expiration.

The procedure is as follows: the daily equity of the test case is ex­ported into an ASCII file, which is then imported into the Microsoft Ex­cel 5.0 spreadsheet. The regression calculations are perfomed in Excel using their built-in tools for regression analysis, as explained in the pre­vious section.

We first tested the 65sma-3cc model on the deutsche mark con­tracts without any stops or exits (case 1). The case 1 equity curve (Figure 6.6), has a linear regression slope of $17.54, and a standard error of $4,043. During the test period, the 65sma-3cc model produced paper profits of $24,288, with a profit factor of 1.34 and a maximum intraday drawdown of-$11,938, trading one contract at time. The equity curve for case 1 is rather jagged, with a significant retracement in 1992, and is typical of trend-following systems without any exits. Note how many trades gave up significant profits before being closed. Also, if the market enters an extended sideways period, this model will suffer drawdowns, and you can go a long time before new equity highs.

Effect of Exits and Portfolio Strategies on Equity Curves 187