From Regime Switching to Fuzzy Logic -SP500
In the previous post I showed how one can implement "regime" switching to create a strategy that switches between a mean-reverting and a momentum sub-strategy.
Can we do something similar (or better) using Fuzzy Logic?
Here's the setup: (here for some Fuzzy Logic backround)
We create a basic membership function for the RSI(2) indicator: "Low", Medium" and "High"
We create a basic membership functions for the Correlation* indicator: "Low","High".
We implement these rules:
1.//mean revert - LOW Autoccorelation
IF "rsi" is "Low" AND "autocorrel" is "Low", "Action", 1 ; //Buy
IF "rsi" is "High" AND "autocorrel" is "Low", "Action", -1 ; //Sell
//MOM - HIGH Autocorrelation
IF "rsi" is "Low" AND "autocorrel" is "High", "Action", -1 ; //Sell
IF "rsi" is "High" AND "autocorrel" is "High", "Action", 1 ; //Buy
Here's the Equity:
Conclusion:
As with Regime switching we can use Fuzzy Logic to solve the problem of using one strategy for trading pre- and post-2000 SP500. Furthermore, we have more robust and less specific rules to deal with (buy on "Low" RSI rather than Buy=RSI2<30).
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*By "Correlation Indicator" I am referring to the 22-day Correlation (see previous post) between the current return and the previous day's return. In Amibroker Code:
Dayreturn=ROC(C,1);
AutoCor=Correlation(Dayreturn,Ref(Dayreturn,-1),22);
