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 Stocks & Commodities V. 36:11 (8–13): The Stiffness Indicator by Markos Katsanos

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 36:11 (8–13): The Stiffness Indicator by Markos Katsanos
INDICATORS

Are Your Stocks Stiff Enough?

The Stiffness Indicator

Find out how stiff your stocks are, or identify the next concept to develop the stiffness indicator and backtest
FAANG stock with this new indicator. it during the past 10 years on all S&P 500 stocks.

T
he FAANG acronym, standing for those well- Introducing the stiffness indicator
known companies Facebook (FB), Amazon The stiffness indicator basically attempts to recog-
(AMZN), Apple (AAPL), Netflix (NFLX), nize strong price trends by counting the number of
and Alphabet (GOOGL), may be familiar to times price was above the 100-day moving average
you. Over the past five years, the FAANG five have (MA) during the indicator period. The premise is the
returned 42.7% annualized compared with a 10.3% fewer number of times price penetrates the MA, the
annualized gain of the Standard & Poor’s 500 stock stronger the trend. This suggests less erratic future
index. In fact, only 20 stocks—or four percent of price movement as well.
companies listed on the S&P 500—constitute about I also introduced a volatility threshold that excludes
70% of the index’s return. minimal penetrations of less than 0.2 standard devia-
If you could identify these stocks early on, you too tions. The default MA is 100 days and the indicator
could accumulate impressive profits. But what do the period is 60 days.
FAANG or similar stocks have in common? Look- The stiffness indicator is calculated as follows:
ing at the charts of these stocks, you can observe the Multiply the number of times price closed above the
trend is typically made up of several legs, separated by MA during the indicator period by 100 and divide
shallow and short corrections (Figure 1). The uplegs by the period. Thus, the higher the indicator value,
are tradable, as they last from four months to a year, the stronger the price trend. The maximum indicator
on average. Notice also that during the uplegs, price value is 100 and suggests a strong trend that occurs
almost never (except at the trend’s beginning) pen- in the case of no or small penetrations of less than
etrates the 100-day moving average (MA). An obvious 0.2 standard deviations.
(in retrospect) strategy would
be to buy the dips as long as
you can correctly identify the
correction’s bottom.
An alternative and safer
strategy is to trade them af-
ter a strong and high-quality
trend has been established.
In my June 2018 S&C article
(see Further Reading at end),
I introduced the stiffness
coefficient, which improved
amibroker

test results considerably by fil-

Inga Poslitur

tering out weak price trends. Figure 1: Three-year chart of Amazon.com. You can see that short and shallow corrections (shaded in gray) are
In this article, I will use this followed by stiff uptrends.

by Markos Katsanos

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 36:11 (8–13): The Stiffness Indicator by Markos Katsanos
Figure 2: Chart of Align Technologies (ALGN) from early 2016 to June 2018. In the upper window you see the 60-day stiffness indicator. Periods where
the indicator is over 90 are shaded in light gray. The blue line in the lower window is the 100-day moving average (MA) and the red line below it is the 100 MA minus 0.2
standard deviations.
The indicator can be expressed mathematically as follows:
MA2 = MA(C,100)-
0.2*StDev(C,100);
P = Sum(C>MA2,60);
Stiffness = P*100/60;
where C is the closing price, and
StDev(C,100) is the 100-day standard deviation.
In the chart of Align Technologies (ALGN) in Figure 2 you
see that during the last 30 months depicted in the chart, the
stiffness indicator reached the maximum value (100) twice and
correctly identified both tradable trend legs: The first one in
2016 produced a profit of 17% in six months, and the second
one from the end of April 2017 until April of 2018 produced
a profit of 110% in a year. The trends are shaded in gray in
the chart.
Testing method
To evaluate the usefulness of the stiffness indicator, I designed
and tested a simple trading strategy with the following rules:
• A long position is initiated when the stiffness crosses
over 90.
• When it comes to trading strategies for stocks, what is
more important is the market index. However good your
strategy is, the odds are you are going to lose money in
Copyright © Technical Analysis Inc. www.Traders.com
a down market. Therefore, to eliminate trades in a bear
market, I introduced a market direction condition that
filtered out trades when the 100-day exponential mov-
ing average (EMA) of the S&P 500 or the SPY ETF was
pointing down.
• I hold the long position until the stiffness crosses under
50, or four months at the latest.
These rules can be expressed mathematically as follows:
Buy condition 1: Stiffness (100,60) crosses over 90
Buy condition 2: EMA (SPY,100) > EMA (SPY,100)
Sell condition 1: Stiffness (100,60) crosses under 50
Sell condition 2: Bars since entry ≥ 84 (four months)
I confined the backtest to the S&P 500 stocks. A problem in
backtesting was the prolonged bull market, which favored the
buy & hold method. To include a wide sample of market condi-
tions, I extended my test to the previous 10 years. The initial
capital was $200,000 and the trade size $10,000. Signals were
executed the next day at the open and commissions were $0.01
per share. The AmiBroker AFL code for the stiffness indica-
tor, test system, and an exploration can be found in the sidebar
“AmiBroker AFL Code.”
To evaluate the efficacy of the stiffness strategy, I compared its
performance with the standard benchmark buy & hold system,
which involved buying and holding an equal dollar amount of
the SPY ETF for the last five- and 10-year test periods until
July of 2018.
 Stocks & Commodities V. 36:11 (8–13): The Stiffness Indicator by Markos Katsanos

Despite the prolonged bull

market during the last five
years, the system managed to
beat the buy & hold investor,
producing 44% more profits
with 25% less drawdown.

During this period, the buy & hold investor suffered a dev-
astating 48% drawdown versus a manageable 15% drawdown
of the system. This system is only profitable for about 60% of
the trades, which is enough to make money consistently.

Figure 3: 3D optimization chart of the S&P 500 stocks from July 2008 Using stiffness in a trading strategy
to July 2018. The system was optimized for values of the moving average from 50 The system presented in this article is not a complete trading
strategy. It was designed to assess the efficacy of the stiffness
to 120 days on the x-axis and stiffness period from 30 to 80 days on the y-axis. The
profit factor is plotted on the z-axis. Parameter combinations producing a profit factor
> 2.1 protrude above the waterline (blue horizontal plane). indicator. However, you can further improve the accuracy of
the current system if you use it with other noncorrelated indi-
5 Year 10 Year cators or patterns.
Performance
Buy & Hold Stiffness Buy & Hold Stiffness
You can accomplish this by adding an oversold/overbought
indicator such as the relative strength index (RSI) and only take
Net Profit $136,000 $195,600 $234,000 $492,000
trades when the short-term (three- to six-day) RSI is oversold
Annual Return 10.90% 14.60% 8.06% 13.20%
and turns up while the stiffness indicator is bullish.
Trades 1 430 1 1030 Once you enter a long position, your next concern should
% Profitable N/A 60.9% N/A 63.4% be to apply an exit strategy. In the current test system, I used
Max % Drawdown -14.3% -10.7% -47.9% -15.5% only the stiffness indicator, but there is absolutely no reason to
Reward/Risk 3.60 5.33 2.37 6.8 use the same indicator for exits. In fact, the stiffness indicator
Profit Factor N/A 2.50 N/A 2.6 generally provides lagging exit signals and I would therefore
Max Duration (months) 60 4 60 4
advise traders to use a faster indicator such as Wilder’s parabolic.
I’ve also tested a few stop-loss schemes and found that they all
Stocks Tested SPY SP-500 SPY SP-500
reduce yield without any significant drawdown improvement.
Figure 4: evaluating the system. You can see here the system performance Tight stops increase the number of prematurely aborted trades,
during the last five- and 10-year period until July 6, 2018.
while wide stops lock in large losses. This can be attributed
partly to the market’s long-term tendency to rise.
For this test, I used the default parameters, that is, 100 days On the other hand, the profitability improved by adding a
for the MA and 60 days for the stiffness period. In the 3D volatility-adjusted profit target six to 10 times the average true
optimization chart in Figure 3, you can see the strategy was range (ATR).
profitable for a wide range of MA periods from 70 to 110 days
and stiffness periods from 55 to 65 days. Notice also that for The bottom line
higher values of stiffness periods, the system is only profitable Momentum trading has always been a
for higher values of MA greater than 100 days. profitable and reliable method not only
because it has worked well in the past but
System evaluation also because of human nature. After all,
In the table in Figure 4, you can see the test simulation results everybody loves a winner. The problem
of a five- and 10-year backtest. Despite the prolonged bull with momentum strategies is they are
market during the last five years, the system managed to beat complex to model.
the buy & hold investor, producing 44% more profits with 25% The performance tests presented in
less drawdown. this article have convinced me that the
The true potential of the stiffness concept, however, became stiffness indicator can be used to en-
apparent during the 10-year test, where the system produced hance the probability outcome of such
profits double that of the buy & hold with a third of the risk. a momentum strategy.

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 36:11 (8–13): The Stiffness Indicator by Markos Katsanos

Markos Katsanos is the author of Intermarket Trading Strate- Further reading

gies and is a Stocks & Commodities Contributing Writer. He
can be reached at markos.katsanos@gmail.com or through his
website, http://mkatsanos.com.
The code given in this article is available in the Article Code section
of our website, Traders.com.
See our Traders’ Tips section beginning on page 48 for commentary
and implementation of Markos Katsanos’s technique in various
technical analysis programs. Accompanying program code can be
found in the Traders’ Tips area at Traders.com.
Katsanos, Markos [2008]. Intermarket Trading Strategies, John
Wiley & Sons.
[2016]. “Which Trend Indicator Wins?” Technical Analy-
sis of Stocks & Commodities, Volume 34: October.
[2018]. “A Technical Method For Rating Stocks,”
Technical Analysis of Stocks & Commodities, Volume
36: June.
Kaufman, Perry [2014]. “A Better Trend,” Technical Analysis
of Stocks & Commodities, Volume 32: April.
‡AmiBroker
‡See Editorial Resource Index
†See Traders’ Glossary for definition

AMIBROKER AFL CODE

Stiffness Indicator STIF=PENS*100/PERIOD; STIFFNESS=EMA(STIF,3);

//STIFFNESS INDICATOR SPY=Foreign("SPY","C");
//Copyright Markos Katsanos 2018 BUY=EMA(SPY,100)>=Ref(EMA(SPY,100),-2) AND
Period=Param("Stiffness Period", 60, 2, 1000, 1 ); Cross(STIFFNESS,STIFFCRIT) ;
MAB=Param("Moving Average Period",100,2,1000,1); Sell=Cross(STIFFSELL,STIFFNESS);
SM=Param("Smooth Coeff.",3,1,20,1);
STIFFCRIT=Param("STIFFCritical",90,70,100,5); //time exit
NSTD=Param("Min SD",.2,0,2,.5); ApplyStop( stopTypeNBar, stopModeBars, timeexit*21 );

//STIFFNESS
MA2=MA(C,MAB)-NSTD*StDev(C,MAB); Stiffness exploration
CLMA=C>MA2; //STIFFNESS EXPLORATION
PENS=Sum(CLMA,PERIOD); //Copyright Markos Katsanos 2018
STIF=PENS*100/PERIOD; STIFFNESS=EMA(STIF,SM);
Plot(stiffness,"STIFFNESS",colorRed ,styleHistogram ); MAB=100; // MA DAYS
Plot(STIFFCRIT,"STIFFCritical",colorGreen,styleThick); PERIOD=60;// STIFFNESS PERIOD
STIFFCRIT=90;// STIFFNESS CRITICAL

Stiffness strategy //STIFFNESS

//STIFFNESS STRATEGY MA2=MA(C,MAB)-.2*StDev(C,MAB);
//Copyright Markos Katsanos 2018 CLMA=C>MA2;
PosQty=500; PENS=Sum(CLMA,PERIOD);
SetOption( "MaxOpenPositions", PosQty ); STIF=PENS*100/PERIOD; STIFFNESS=EMA(STIF,3);
SetPositionSize( 10000, spsValue );
SetTradeDelays( 1, 1, 1, 1 ); SPY = Foreign("SPY","C");
BuyPrice=OPEN;
SellPrice=OPEN; FILTER=EMA(SPY,100)>=Ref(EMA(SPY,100),-2) AND
timeexit=Optimize("exit",4,4,4,1); //MONTHS Cross(STIFFNESS,STIFFCRIT) ;
MAB=Optimize("MAB",100,50,120,10); // MA DAYS
PERIOD=Optimize(" STIFF PERIOD",60,40,80,10); AddColumn(C,"Price",1.2);
STIFFCRIT=Optimize("STIFFCRIT",90,90,95,5); AddColumn(Volume,"Volume",1.0);
STIFFSELL=Optimize("STIFFSELL",50,50,60,10); AddColumn(MA(Volume,2)/MA(Volume,50),"V/Vave",1.2);
AddColumn(RSI(6),"RSI",1);
//STIFFNESS AddColumn(STIFFNESS,"STIFFNESS",1.2);
MA2=MA(C,MAB)-.2*StDev(C,MAB); AddColumn(C+8*ATR(50),"PROFIT TARGET",1.2);
CLMA=C>MA2;
PENS=Sum(CLMA,PERIOD);

Copyright © Technical Analysis Inc. www.Traders.com

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