RSI Strategy On FCPO - It Works Again !

Remember the simple trend-following that uses RSI(14) that I've backtested on FKLI and it works?  Guess what, I've backtested the strategy on FCPO(Crude Palm Oil Futures) from Jan 1996 - Sep 2009 (EOD continuous 3rd-month unadjusted data) using basic 1 contract and stop-and-reverse strategy.  

The same logic that uses RSI(14) to catch early trend by going Long when daily RSI value crosses above 55 and trend-follow until turning Short when the daily RSI crosses below 45.  The hypothesis is that in a strong uptrend, the daily RSI(14) will cross above 55 and seldom drop below 45, and the reverse is also true for going Short.  The backtest is done without any stepping optimization and filters, just pure default settings of RSI(14) and arbitrary RSI value of 55-45.  That means the result can be further improved if you are interested in it and think that the logic behind is sound.  Of course you'll have to start performing proper statistical backtest (I will discuss in my future postings) on different products to get a robust system.

Here's the performance summary result:

and here's the equity curve (before cost) chart:

Nothing much to say here except that it is a profitable strategy on FCPO (a very volatile product).  In fact, it perform better (CAGR, Sharpe ratio basis) than the FKLI that we have tested!  It just shows that commodity generally tend to trend more than equity therefore a trend-following strategy will perform better over a long period of time, in this case more than 13 years. 

However, further optimization and improvement will have to be done as the volatility of return (a risk measurement) is relatively huge and the max-close-drawdown-to-starting-capital is too big for most people to stomach (over 50%)!  Notice the largest profit on 1 contract? Over RM46K or 1852 points?  Can you hold your urge to take profit that long?  Or  can you handle the almost 300 point largest loss per contract?  Just make sure you don't have heart attack!  Happy trading and good luck.

Disclaimer: Taken from CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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WHATEVER YOU READ HERE SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS ARE YOUR OWN RESPONSIBILITY.