Direction Rules
These rules validate the direction of the order (long or short).
Validate that the order's direction is aligned to the SuperTrend indicator i.e. a long order is not placed when the SuperTrend is indicating a down trend. More information on the inner workings of the SuperTrend indicator can be found online.
Parameters
- Period: defaulted to 10. Period of the underlying ATR calculation (Average True Range)
- Method: defaulted to SMA (Simple Moving Average). Other permissable values are EMA (Exponential Moving Average) and Smoothed (Wilder's Smoothing Method). More information available here: https://www.macroption.com/atr-calculation/
- Factor: multiplier to establish the lower and upper bands of the indicator
At its core, this rule validates that the order is not placed when a stock is overextended (overbought in the case of a Long, oversold in the case of a short). The rule relies on the RSI indicator as its key metric and look at historical pricing data to determine statistically relevant levels for the RSI including whether it is a reliable indicator or not. This rule also provides contextual information on historical RSI levels at which the price has changed direction.
The typical view of tactical analysts is that an RSI over 70 means a stock is overextended. Unfortunately this statement really does not apply to all instruments and, statistically, not entering a position because the RSI is over 70 has, in the whole, a detrimental effect on overall returns. This can be explained by the fact that stocks in the red actually are in high demand and will continue to be so for the foreseeable future. Inversely, stocks which stay with the 30 to 70 channel might simply be going sideways.
This is not to say that the RSI is a bad indicator, it is just not good enough in its standard form for tactical risk management. MantaRisk looks at the RSI indicator and, in simple terms, computes the probability an instrument will reverse at for a given value. This leads to a very effective risk management rule (see statistics below) which we recommend including in most risk management strategies.
Parameters
- Upper Limit: limit above which the rule is applied for longs. The default is 30, meaning that an RSI below 30 will automatically be given a green light whereas RSIs above 30 will be analysed. The value must be between 10 and 90.
- Lower Limit: limit below which the rule is applied for shorts. The default is 70, meaning that an RSI above 70 will automatically be given a green light whereas RSIs below 70 will be analysed. The value must be between 10 and 90.
The RSI Not Overextended rule in its default settings possess extremely good qualities with a first quartile above 0 and a skew towards positive values. This is a rule we suggest should be incorporated in most risk management strategies to improve the performance of the portfolios by an average of 0.30% per year.
Metric | Value |
|---|---|
Mean | 0.22% |
Maximum | 3.58% |
90th Percentile | 0.48% |
Third Quartile | 0.31% |
Median | 0.19% |
First Quartile | 0.10% |
10th Percentile | -0.08% |
Minimum | -0.22% |
Please refer to Portfolio Construction Strategies for more information on our testing methodology.
Markets have a tendency to go up. Corrections are generally short in duration and therefore harder to trade. This rule computes the time the selected instrument spent going up versus down and prevents you from entering a Short if the market has an upward bias.