E.A. Olszewski
Department of Physics
University of North Carolina at Wilmington
Wilmington, North Carolina 28403-3297
email: moof@pootie.phy.uncwil.edu
Abstract
A trading system based on market momentum is proposed. The trading system
is applied to S&P~500 futures data during the period from September
14, 1987 to September 27, 1999. The system employs a momentum indicator
which is derived from the Lagrangian associated with an appropriately chosen
stochastic differential equation. Based on rescaled range analysis it is
concluded that the S&P~500 futures index exhibits anti-persistent behavior
so that large price movements in one direction tend to be followed by price
movements in the opposite direction. Consequently, momentum is employed
in the capacity of an oscillator to generate buy or sell signals, i.e.
sell signals are generated on sufficiently high positive momentum and buy
signals on high negative momentum. The system also utilizes an indicator
for predicting the direction of the trend. This indicator is based
on the net open interest of commercials. If commercials are net long the
trend is predicted to be up; if short, the trend is predicted to be down.
When only the momentum component is used for selecting trades, the system
is not, in general, as good as buy-and-hold. However, when the trend component
is used as a filter, i.e.\trades are initiated only in the direction of
the predicted trend, the trading system is, at least, as good as buy-and-hold.