Dynamic Momentum — Part III

This is the third part in the series about Dynamic Momentum Trading. Part I and Part II can be found by clicking on their links.

This discussion will show the the profit-time profile of trades. High-ranked momentum rankings will be viewed in times of how their profits (or losses) developed over time.

The Normal Trading Style of the Dynamic Trading System (DMS) will be used to illustrate. Trades below are shown for the two highest-ranked long trades. For each ranked item, the entry price is shown as is the price one week later. The profit-time profile tracks percentage returns over 1 week, 4 weeks and 13 weeks.

The DMS system is designed to be traded monthly. Thus, the most pertinent column is the 4WkRet%. The 4Wk returns will not agree exactly with the prior profit summaries (see Part II) because some of the trades in the Part II summary are five weeks long. The differing starts and ends of months require that some trades are five weeks rather than four.

The 1 week and 13 week columns are informational only. They enable the reader to judge the pattern of returns over time. Judgments regarding questions like the following may be made:

If a trade starts off badly, how often does it recover?

If a trade is successful for the normal month, is it likely to continue so for the quarter?

How often does the number one ranked trade outperform the second-ranked?

These and other judgments may allow readers to determine whether they want to utilize the rankings in a trading program. They may also provide some indication of the risks involved, at least with respect to past performance.

Normal Trading — Ranks 1 and 2 Long Only and Trade Days