NOTE: This script is for learning purposes only and does not constitute a recommendation for buying or selling any stock mentioned in this script.
SUMMARY: This project aims to construct and test an algorithmic trading model and document the end-to-end steps using a template.
INTRODUCTION: This algorithmic trading model employs a simple mean-reversion strategy using the Moving Average Convergence/Divergence Oscillator (MACD) and Relative Strength Index (RSI) for the entry and exit signals. For the MACD trend indicators, the model will use 12-day and 26-day periods for the MACD line. For the MACD signal line, we will use a 9-day EMA of the MACD line. The RSI will operate using a 14-day look-back period.
The model will signal for a long position when the MACD histogram switches from negative to positive, assuming the RSI signal is below the overbought threshold. Conversely, the model will look to initiate a short position when the signals reverse themselves.
We will compare two trading models with different buying approaches. The first model will use a long-only method, while the second model will take long and short positions. Both models will use a 10% stop-loss limit for each trade.
ANALYSIS: In this modeling iteration, we analyzed ten stocks between October 1, 2011, and October 1, 2021. The models’ performance appeared at the end of the script. The models with the wider signal line width generally produced a better return for the tested stocks. Moreover, the simple buy-and-hold approach came out ahead for all stocks.
CONCLUSION: For most stocks during the modeling time frame, the customized trading strategy with the MACD and RSI signals did not produce a better return than the buy-and-hold approach. We should consider modeling these stocks further by experimenting with more variations of the strategy.
Dataset ML Model: Time series analysis with numerical attributes
Dataset Used: Quandl
The HTML formatted report can be found here on GitHub.