Can The Combination Of Moving Average And Momentum Catch Multiple Dimensions Of Trend

The financial academia have been interested in the study of trading system, especially systems based on technical analysis or other mechanical trading systems for decades. And among all these systems, the moving average system and momentum system have been studied most frequently and in-depth. The reasons are very simple. First, they both are very simple and intuitive, in both simple mathematical form, and the practical application. Second, they are indeed considerable effective, and are both widely used by practitioners, therefore, they have been under a high degree of concern. Thus, they have attracted the attention of many researchers, and there have been so many research and papers on the two trading systems.Since there have been so many related papers, why does this paper still choose these two systems to conduct study? Of course, the answer is that there are some questions have not been answered by the existing research. Those questions come from two aspects. First, and the most important one, is that, almost none of the existing researches has studied the whether the combined system, formed by moving average system and momentum system could get a better performance than the individual one, as the overlay of the two systems, has realistic meaning, which would be explained thoroughly in the following sections. Second, the effect to trading systems, brought by stoploss and money management techniques, has been neglected by most of the existing researches. Besides, most of the existing researches use the time series of returns of a asset to compute a trading system’s return, that’s not the same as in reality, and may lead to misleading conclusions. Based on the previous two arguments, I choose to study the performance of the combined system of the moving average and momentum systems.In this paper, the first part demonstrates the background, and the main purpose of this study. The basic starting points are the same as described above. First, based on such an understanding got from the traditional research, trend following systems, such as moving average system, can capture the trend in the time series direction, and the momentum system can capture the cross-sectional trend. Well, we will explore the problem that if we combine these two systems together, whether it is possible to capture the trend in both two dimensions at the same time, to obtain better performance. Second, in this paper, we would investigate the role played by some trading techniques that are ignored in most of the existing literature, such as stoploss and money management techniques. Besides, the performance of systems will be evaluated with the constraints of position limits be taken into account, in accordance with the reality. And unlike most existing studies, the profits and losses will be calculated using the traded futures contracts’ prices and the real trading number, not by the return series of the assets under trade. In addition, there is another purpose that has not been talked about before, and that was to investigate the advantages could be brought by with applications of a trading system to many different assets simultaneously. That is also a kind of diversified investment, but is slightly different with that in the traditional meaning. Hence, the past studies pay no attention to this. In addition, in this part, the structure of this paper is demonstrated.The second part of this paper briefly reviews the relevant literatures. The selected literatures either make groundbreaking contributions or do empirical analysis in recent years. The relevant literatures are mainly about trend following trading, moving average systems, momentum system as well as the combinations of the two. And these topics have been under in-depth studies abroad, but far more less in China. Domestic studies only began in recent years, most of which,are empirical Studies using China’s stock market data, based on theoretical studies abroad. The studies of commodity futures market are very few, and that is the market studied in this paper. Besides, few existing literatures have considered the combined system formed by moving average system and momentum system, and those have studied this question, just use moving average system as a filter to determine trends to get a filtered momentum system, which is still a single trading system,not the same as what examined in this article, a linear combination of the two independent systems. And another difference with the existing literatures is that, that this paper is mainly concerned about the shorter-term effects, such as daily effects, rather than medium to long term.The third part of this paper explained some theories related to the topics in this research. These elements in turn, including the trend, trend trading, moving average, momentum system, stoploss and trailing stoploss as well as money management techniques. For each parts, we not only introduce the basic definitions and rules, but also give a detailed explanation of the rationale behind, the problems that may be encountered in the use, and roles they can play, as well as which type of traders they are suitable for. And among all parts, the most important are the principles and rules of Bollinger Bands system and momentum systems, as well as the knowledge of stop and trailing stop. Based on this, the rest of the paper explains the specific rules of the trading system will be used in the following empirical part of this paper, including its capital allocation, open signal, add signals, exit signals, stoploss and trailing stop.The fourth part of this paper do a detailed empirical studies, based on the theories explained and specific trading rules built in the third part, using the data of the China’s commodity futures market since its birth, constituted by more than18years of daily closing price data. Using this dataset, we do complete backtesting and analyses. A brief and clear description of the selected dataset has been given firstly, followed by the reasons for selecting this dataset. Then, a brief descriptive statistical analysis is given. Then, following the trading rules constructed in the third part, we backtest the performance of the individual moving average system and momentum system, and many key indicators of performance are summarized in the form of charts or key numbers. Besides, take the moving average system as an example, a detailed comparison of the performance on a single species and the overall performance of diversified system are given. Further, in order to test the effect of the money management techniques, the performance of the two systems under several different money management techniques are given, and compared with the original system. Finally, after the two subsystems were tested after the most critical step test, the combined system are tested, and a very positive result is got:the combined one indeed bring better performance relative to the individual subsystems, in the risk-reward consideration.The last part is the concluding part of this paper. In this part, the purposes of this study and the corresponding results for several key issues, which almost are all positive ones, are summarized. Stoploss and trailing stoploss can add value to the trading system, the advantage of diversified investment in many assets is revealed beyond doubt, and the core issues of this paper, the combination of moving average and momentum systems can improve performance are supported by detailed empirical results from China’s commodity futures market in this paper. The only one result not so positive in this paper is the effect of the money management techniques. That for momentum system perform poor should be expected, but it brings no advantages for the moving average system is really confusing, In this paper it is also pointed out that the follow-up studies should pay attention to this. Finally, in this section, based on the summary of the work done in this paper, related issues to be studied further and the direction for the follow-up study are pointed out.