In a past article, Predictive Indicators written by John Ehlers, he highlighted a unique indicator used to time market cycles. This indicator is a heavily modified Stochastic Oscillator and was demonstrated on the S&P. In this article, I want to put John’s Oscillator to the test by comparing it to another popular indicator Backtesting Environment for this entire article, the backtest will be conducted from January 1, 2000 to December 31, 2016. I will be deducting $5 in commissions and two-ticks of slippage per round trip. I will trade one contract per signal on a $100,000 account. Profits will not be reinvested. The backtest will be conducted on a basket of index futures. The markets I will use are:
- E-mini S&P
- E-mini DOW
- E-Mini NASDAQ
- E-Mini RUSSEL 2000
- E-Mini S&P MidCap 400
John’s Oscillator Performance
These are interesting results and seem to verify that for these stock index markets, this indicator is a decent predictor of market turning points. We have a profit of over $434K which gives us a compounded annual rate of 10.36%. The profit factor is 1.33 and drawdown only exceeded 18% once. Let’s now compare it to another popular indicator used to locate potential turning points.
In the 2-period RSI Oscillator I created a simple strategy to open long trades when the 2-period RSI crosses below 10 and to sell short when price crosses above 90. This is a similar concept to John’s Oscillator as both strategies are either long or short. Below are the results of this strategy.
In this case, we can see the 2-period RSI under perform John’s Oscillator. Not only does it underperform in terms of net profit, profit factor, sharp ratio, and average annual return but the drawdown is larger. We have a profit of over $235K which is about $199K less than John’s Oscillator. The compounded annual rate is 7.37%. The profit factor is 1.24 and drawdown exceeds 20% many times and peaks at around 48%. John’s Oscillator does appear to pick turning points better than the 2-period RSI on the stock index markets. Using John’s Oscillator combined with these markets might just be a great place to start building a profitable trading system. In a future article, I’m going to compare it to a few other indicators and then move to other markets such as currency futures, commodities, and bonds.
- The text for this strategy is available in the article, Predictive Indicators