This strategy is going to use the volume weighted average price (VWAP) as an indicator to trade mean version back to VWAP. **Annualized Sharpe Ratio (Rf=0%) is**** 0.9016936**.

This post is a response to http://gekkoquant.com/2012/07/29/trading-strategy-sp-vwap-trend-follow/ where there was a bug in the code indicating that VWAP wasn’t reverting (this didn’t sit well with me, or some of the people who commented). As always don’t take my word for anything, backtest the strategy yourself. One of the dangers of using R or Matlab is that it’s easy for forward bias to slip into your code. There are libraries such as Quantstrat for R which protect against this, but I’ve found them terribly slow to run.

Trade logic:

- All conditions are checked at the close, and the trade held for one day from the close
- If price/vwap > uLim go short
- If price/vwap < lLim go long

Onto the code:

^{?}View Code RSPLUS

library("quantmod") library("PerformanceAnalytics") #Trade logic - Look for mean reversion #If price/vwap > uLim go SHORT #If price/vwap < lLim go LONG #Script parameters symbol <- "^GSPC" #Symbol nlookback <- 3 #Number of days to lookback and calculate vwap uLim <- 1.001 #If price/vwap > uLim enter a short trade lLim <- 0.999 #If price/vwap < lLim enter a long trade #Specify dates for downloading data startDate = as.Date("2006-01-01") #Specify what date to get the prices from symbolData <- new.env() #Make a new environment for quantmod to store data in getSymbols(symbol, env = symbolData, src = "yahoo", from = startDate) mktdata <- eval(parse(text=paste("symbolData$",sub("^","",symbol,fixed=TRUE)))) mktdata <- head(mktdata,-1) #Hack to fix some stupid duplicate date problem with yahoo #Calculate volume weighted average price vwap <- VWAP(Cl(mktdata), Vo(mktdata), n=nlookback) #Can calculate vwap like this, but it is slower #vwap <- runSum(Cl(mktdata)*Vo(mktdata),nlookback)/runSum(Vo(mktdata),nlookback) #Calulate the daily returns dailyRet <- Delt(Cl(mktdata),k=1,type="arithmetic") #Daily Returns #signal = price/vwap signal <- Cl(mktdata) / vwap signal[is.na(signal)] <- 1 #Setting to one means that no trade will occur for NA's #Stripping NA's caused all manner of problems in a previous post trade <- apply(signal,1, function(x) {if(x<lLim) { return (1) } else { if(x>uLim) { return(-1) } else { return (0) }}}) #Calculate the P&L #The daily ret is DailyRet(T)=(Close(T)-Close(T-1))/Close(T-1) #We enter the trade on day T so need the DailyRet(T+1) as our potential profit #Hence the lag in the line below strategyReturns <- trade * lag(dailyRet,-1) strategyReturns <- na.omit(strategyReturns) #### Performance Analysis ### #Calculate returns for the index indexRet <- dailyRet #Daily returns colnames(indexRet) <- "IndexRet" zooTradeVec <- cbind(as.zoo(strategyReturns),as.zoo(indexRet)) #Convert to zoo object colnames(zooTradeVec) <- c(paste(symbol," VWAP Trade"),symbol) zooTradeVec <- na.omit(zooTradeVec) #Lets see how all the strategies faired against the index dev.new() charts.PerformanceSummary(zooTradeVec,main=paste("Performance of ", symbol, " VWAP Strategy"),geometric=FALSE) #Lets calculate a table of montly returns by year and strategy cat("Calander Returns - Note 13.5 means a return of 13.5%\n") print(table.CalendarReturns(zooTradeVec)) #Calculate the sharpe ratio cat("Sharpe Ratio") print(SharpeRatio.annualized(zooTradeVec)) |