Simple Moving Average algorithm & backtest

2019-10-12 Analysis R machine learning timeseries Comments

I decided to try making a simple algorithm trader in R.

The algorithm is based on the “moving average crossover”. Basically, the idea is to take two simple moving averages (SMAs) – one that averages over a longer time window, and one that averages over a shorter time window – and buy or sell based on when the two SMAs crossover. Here I used 50-day and 200-day SMAs. Buy decisions were when the SMA-50 went above the SMA-200, and sell decisions were when the SMA-50 went below the SMA-200.

To obtain historical stock data, I used the alphavantager R package to access the Alpha Vantage API; the tidyquant package to calculate simple moving averages; and tidyverse, ggplot2, etc to wrangle and visualize data.

I picked Tesla (ticker: “TSLA”) as the stock I would invest in, because as I understand it has had a lot of volatility which makes it fruitful for day trading. I assumed a $100 USD investment and simulated a backtest over the daily close data between 2015 and 2019. TL;DR: My algorithm did not make money. But this was a fun exercise nonetheless!

Setup

Load libraries.

library(tidyverse)
library(tidyquant)
library(alphavantager)
library(reshape2)
library(ggplot2)
library(lubridate)

Set Alphavantager key.

# av_api_key(readLines("C:/Users/tyler/Documents/av_key.txt"))

Get historical stock data

Get daily price data between 2016 and 2019.

# av_get(symbol = "TSLA",
#        av_fun = "TIME_SERIES_DAILY",
#        outputsize = 'full') %>%
#   select(timestamp, close, high, low) %>%
#   filter(timestamp > as.Date('2015-01-01') &
#          timestamp < as.Date('2019-12-31')) -> df
# save(df, file = "tsla_price_data.RData")

load("tsla_price_data.RData")

Simple Moving Averages

Calculate simple moving averages (50-day and 200-day).

df %>%
  mutate(sma_50 = SMA(close, n = 50),
         sma_200 = SMA(close, n = 200)) %>%
  filter(!is.na(sma_200)) -> df_with_sma

Convert long to wide.

melt(df_with_sma, id.vars = c("timestamp")) -> df_long

Plot daily close, SMA50 and SMA200.

df_long %>%
  filter(variable %in% c('close', 'sma_50', 'sma_200')) %>%
  ggplot(., aes(x = timestamp, y = value)) + 
    geom_line(aes(color = variable), size = 1) + 
    ggtitle("TSLA stock with SMAs")

Encode buy/sell signals and decisions

We’ll use SMA50/SMA200 crossover events to make buy/sell decisions.

Buy if SMA50 > SMA200 (unless we’ve bought already)
Sell if SMA50 < SMA200 (unless we’ve sold already)

We’ll encode the decisions in two passes: the first pass will encode the signal, and the second pass will encode the decision. Basically, the decision encoding will make sure we won’t buy again if the last action was to buy, and we won’t sell again if the last action was to sell.

df_with_sma %>%
  mutate(
    # Buy if SMA50 > SMA200
    # Otherwise sell
    signal = case_when(
      sma_50 > sma_200 ~ "buy",
      sma_50 < sma_200 ~ "sell"
    ),
    # Create a lagging indicator for action
    previous_signal = lag(signal, 1),
    # Encode hold as any time when current and last action are the same
    # since we don't want to keep buying / selling
    decision = case_when(
      signal == previous_signal ~ "hold",
      TRUE ~ signal
    )
  ) -> df_with_decisions

Extract the periods when we would have bought or sold.

df_with_decisions %>%
  filter(decision != 'hold') %>%
  select(timestamp, close, high, low, sma_50, sma_200, decision) -> df_bought_sold

df_bought_sold

## # A tibble: 12 x 7
##    timestamp  close  high   low sma_50 sma_200 decision
##    <date>     <dbl> <dbl> <dbl>  <dbl>   <dbl> <chr>   
##  1 2015-10-16  227.  230.  223.   243.    232. buy     
##  2 2015-11-16  214.  215.  206.   233.    233. sell    
##  3 2016-05-02  242.  243.  235.   227.    226. buy     
##  4 2016-07-07  216.  218.  213.   218.    218. sell    
##  5 2016-07-21  220.  228.  219.   217.    217. buy     
##  6 2016-10-05  208.  213.  208.   214.    215. sell    
##  7 2017-01-31  252.  256.  248.   214.    214. buy     
##  8 2017-12-12  341.  341.  330.   326.    326. sell    
##  9 2018-08-02  350.  350.  323.   319.    318. buy     
## 10 2018-09-11  279.  282   274.   317.    318. sell    
## 11 2018-12-03  358.  366   352    313.    312. buy     
## 12 2019-02-28  320.  320   311.   316.    316. sell

Visualizing the algorithm decisions

Visualize the decisions by plotting them as vertical intercept lines over the graph.

df_long %>%
  filter(variable %in% c('close', 'sma_50', 'sma_200')) %>%
  ggplot(., aes(x = timestamp, y = value)) + 
  geom_line(aes(color = variable), size = 1) +
  geom_vline(data = df_bought_sold %>% filter(decision == 'buy'), 
             aes(xintercept = as.numeric(timestamp)),
             col = 'black',
             linetype="dashed") +
  geom_vline(data = df_bought_sold %>% filter(decision == 'sell'), 
             aes(xintercept = as.numeric(timestamp)),
             col = 'red') + 
  ggtitle("TSLA stock with SMAs and algorithmic buy/sell decisions\n(black = buy, red = sell)")

Simulating the backtest

Calculate gains/losses, assuming 100 initial investment, and assuming we buy/sell at the mid-day price.

usd <- 100
shares <- 0
stock_price <- NA
for(i in 1:nrow(df_bought_sold)){
  stock_price <- (df_bought_sold[i,]$high + df_bought_sold[i,]$low)/2
  
  if(shares > 0 && df_bought_sold[i,]$decision == "sell") {
    
    print(paste0("SELL: ", shares, " shares @ $", stock_price, " USD"))
    usd <- stock_price * shares
    print(paste0("USD IS NOW @ ", round(usd, 2)))
    shares <- 0
    
  } else if(usd > 0 && df_bought_sold[i,]$decision == "buy"){
    
    print(paste0("BUY: ", shares, " shares @ $", stock_price, " USD"))
    stock_price <- df_bought_sold[i,]$close
    shares <- usd/stock_price
    usd <- 0
    
  }
  
  cat("\n")
  
}

## [1] "BUY: 0 shares @ $226.66995 USD"
## 
## [1] "SELL: 0.440509228668341 shares @ $210.39 USD"
## [1] "USD IS NOW @ 92.68"
## 
## [1] "BUY: 0 shares @ $239.005 USD"
## 
## [1] "SELL: 0.38328675194182 shares @ $215.565 USD"
## [1] "USD IS NOW @ 82.62"
## 
## [1] "BUY: 0 shares @ $223.4735 USD"
## 
## [1] "SELL: 0.374708429398361 shares @ $210.635 USD"
## [1] "USD IS NOW @ 78.93"
## 
## [1] "BUY: 0 shares @ $251.795 USD"
## 
## [1] "SELL: 0.313288254778405 shares @ $335.735 USD"
## [1] "USD IS NOW @ 105.18"
## 
## [1] "BUY: 0 shares @ $336.575 USD"
## 
## [1] "SELL: 0.300915008920375 shares @ $277.775 USD"
## [1] "USD IS NOW @ 83.59"
## 
## [1] "BUY: 0 shares @ $359 USD"
## 
## [1] "SELL: 0.233163174991931 shares @ $315.405 USD"
## [1] "USD IS NOW @ 73.54"

Final result

What was our total ROI?

total_return <- usd/100
print(paste0("Total return: ", round(total_return*100)-100, "%"))

## [1] "Total return: -26%"

Wow that did not turn out well!

Permalink: https://tylerburleigh.com/blog/simple-moving-average-algorithmic-backtest/

License：CC BY 4.0 CN

Tyler Burleigh

Quantitative Researcher