Edition

IFTA JOURNAL
2017 EDITION
Table 4. Performance statistics for two secular bull markets
Figure 9. Risk and return statistics for two secular bull
markets
The backtest results reveal that the RSI (14) model
underperformed buy and hold for both secular bull markets, on
average by 871.15% (Table 5). However, on average over the two
time periods, the RSI (14) model’s maximum drawdown was 3.13%
better than buy-and-hold, and the standard deviation was 3.31%
lower than buy and hold, which is an indication of lower risk.
Table 5. Performance of the RSI (14) model compared to
buy and hold for two secular bull markets
The risk (standard deviation) versus return (overall
performance) characteristics of using the RSI (14) model in a
secular bull market show that there is a cost to be paid for added
protection (Figure 9). For both secular bull markets studied,
the results showed that the RSI (14) model had lower standard
deviation than buy and hold; however, the tradeoff was that the
overall return was also lower compared to buy and hold.
The next test case analyzes the trade data generated by the
model. The RSI (14) model triggers either a buy or sell trade
based on the timing rules. Figure 10 shows the distribution of
number of trades generated for both secular bull markets. The
chart shows a distribution with the most prominent number of
trades per year focused in the 2–4 range; which is higher than
the secular bear market cases studied.
Figure 10. The distribution of the number of trades per
year for the RSI(14) model for two secular bull markets
Transactional costs associated with using a trend-trading
model in a secular bull market are damaging to the overall
performance versus buy and hold. Adjusting for the model
transaction or frictional trading costs is provided in Table 6.
Transaction costs include bid–ask spreads and commissions. The
transaction costs for both secular bull markets were, on average,
at 0.54% per round trip trade (i.e., including buy and sell trades
together). The transactional costs resulted in a 29.15% drag on
relative performance for the period of 1942–1966 and a 34.40%
drag on relative performance for the period of 1978–2000.
Table 6. Performance with transaction costs for two
secular bull markets
As with any trend-trading model, there will be times when
the investor is not in the market, based on the model’s signal.
The rules employed by the RSI (14) model assume the investor
is either in the market (long) or out (cash). Figure 11 illustrates
the average percentage of weeks per year that the investor is
long for each number of trades per year, along with the average
relative return.
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