Stress

Description

The Stress strategy is based upon the Stress Indicator, a stochastic type study developed by Perry Kaufman. Data derived from the Stress Indicator is adapted for hedging and expanded with several safety techniques, such as stop-loss and minimum price. In addition to adding standard simulated buy and sell orders, the Stress strategy marks time points where hedging the instrument with an index could be or could have been useful. It also calculates the hypothetical hedging size for these points.

Simulated Trade Orders

An initial simulated buy order is added when the Stress Indicator falls below the specified entry level and the index is in uptrend. After an exit, the simulated buy order is only added when the Stress Indicator falls below the entry level from above 50.

The simulated sell order is added when any of the following conditions are true:

• Stress Indicator goes above the exit level;

• Decline in price from the entry point exceeds the stop-loss percentage value;

• Price falls below the minimum level at least once during the specified min price length period.

Hedging

Hedging is treated by the strategy as an independent process solely based on the trend of the chosen index. When index is in downtrend, the strategy indicates that hedging could be useful and calculates the hypothetical hedge size. Here, the downtrend is identified when the average close price of the index falls. The hedging size (i.e., the trading of the index) is calculated as hedge ratio times stock position times stock to index volatility ratio. Both stock volatility and index volatility are calculated using the standard deviation formula.

Input Parameters

Plots

Further Reading

1. "Timing The Market With Pairs Logic" by Perry Kaufman. Technical Analysis of Stocks & Commodities, March 2014.