May 16, 2007

Build an ETF Trend System in Excel

Today I wanted to share with you a part of the algorithmic back end to my ETF Trend System. Note, I said part, I’m not giving away all my secrets. It’s written completely in Excel, incredibly simple, and is a macro that you can import. The system works by using something called linear regression slope.

What’s that?

The easiest way to understand what linear regression slope is, is to think back to your basic statistics class. Linear regression is the best fit” line between a bunch of data points. A line is defined by the formula: y = mx+b, where y is your data point’s position on the y-axis, m is the slope, x is your data point’s position on the x-axis, and b is the slope intercept. What this ETF Trend following system does is place a best fit” line across several price data points (8, 13, and 26 weeks) and then calculate the slope of the line. If the slope is positive, you have an upward trending ETF. Conversely, if the slope is negative then you have a downward tending slope.

As the ETF trades in the markets, the price goes up, down, and sometimes consolidates inside a trend. When that happens the linear regression slope begins to flatten” out, meaning the slope becomes more horizontal. When combined with two or more periods, like an 8, 13, and 26 week period, you can see the overall short-term, medium-term, and long-term trends in a particular ETF. This makes for a great indicator that warns you of either a change in trend or a dip buying opportunity.

Ready to try it out for yourself? Just follow these easy steps and you’ll be ETF Trend following in no time. First you have to make sure you have Excel 2003 or a later version installed and access to ETF data.

Step 1: Get two years of ETF data. You’ll need your favorite ETF and two years of weekly closing data. Make sure you include the date, open, high, low, and closing prices. You can cheat, and follow along with my example by downloading this XLS: GSPC ETF Trend Example

In the example contained in this lesson, I use the S&P500 weekly data but you can substitute that with any ETF or index you’d like to follow

Step 2: Copy the macro code below and paste it into your Excel Visual Basic Editor. You can find this editor by going to Tools > Macros > Visual Basic Editor.

Sub ETF_TREND()

′ LinReg Macro
′ Macro recorded 3/8/2007 by Thomas Ott

Clear Data
Columns(“G:Q”).Select
Selection.ClearContents
Calc ETF Trends
Range(“G1”).Select
ActiveCell.FormulaR1C1 = 8 Week”
Range(“H1”).Select
ActiveCell.FormulaR1C1 = 13 Week”
Range(“I1”).Select
ActiveCell.FormulaR1C1 = 26 Week”
Range(“G9”).Select
ActiveCell.FormulaR1C1 = =SLOPE(R[-7]C[-2]:RC[-2],R[-7]C[-6]:RC[-6])”
Selection.AutoFill Destination:=Range(“G9:G54”), Type:=xlFillDefault
Range(“G9:G54”).Select
Range(“H14”).Select
ActiveCell.FormulaR1C1 = =SLOPE(R[-12]C[-3]:RC[-3],R[-12]C[-7]:RC[-7])”
Selection.AutoFill Destination:=Range(“H14:H54”), Type:=xlFillDefault
Range(“H14:H54”).Select
Range(“I27”).Select
ActiveCell.FormulaR1C1 = =SLOPE(R[-25]C[-4]:RC[-4],R[-25]C[-8]:RC[-8])”
Selection.AutoFill Destination:=Range(“I27:I54”), Type:=xlFillDefault
Range(“I27:I54”).Select
Format Columns
Range(“G9”).Select
Selection.FormatConditions.Delete
Selection.FormatConditions.Add Type:=xlCellValue, Operator:=xlLess,
Formula1:=“0”
Selection.FormatConditions(1).Font.ColorIndex = 3
Selection.FormatConditions.Add Type:=xlCellValue, Operator:=xlGreater,

Formula1:=“0”
Selection.FormatConditions(2).Font.ColorIndex = 50
Selection.Copy
Range(“G9:I54”).Select
Selection.PasteSpecial Paste:=xlPasteFormats, Operation:=xlNone, _
SkipBlanks:=False, Transpose:=False
Application.CutCopyMode = False
Selection.NumberFormat = 0.000000”
Selection.NumberFormat = 0.00000”
Selection.NumberFormat = 0.0000”
Selection.NumberFormat = 0.000”
Percent Change Function
Range(“J1”).Select
ActiveCell.FormulaR1C1 = % Change”
Range(“J2”).Select
ActiveWindow.SmallScroll Down:=18
Range(“J53”).Select
ActiveCell.FormulaR1C1 = =(RC[-5]-R[-51]C[-5])/R[-51]C[-5]”
ActiveWindow.SmallScroll Down:=6
Selection.Style = Percent”
Selection.NumberFormat = 0.0%”
Selection.NumberFormat = 0.00%”
Selection.AutoFill Destination:=Range(“J53:J54”), Type:=xlFillDefault
Range(“J53:J54”).Select
End Sub

Step 3: Save the file and then activate the macro by clicking Run. You should see that the macro created four new columns and color coded the slopes. It should look something like this XLS: GSPC ETF Trend Example 2

Step 4: This step is optional but I highly recommend you do this. You should build a chart from that 8, 13, and 26 week slopes. This will help you identify the peaks and valleys in the ETFs (or index’s) trend. See our last XLS example: GSPC ETF Trend Example 3

There you have it! A very simple and fun way for you to build a basic ETF trend system. Please feel free to modify the macro, or add to it as you see fit. If you have any questions or comments, please feel free to contact me.



ETF Trend System tutorials Excel


Previous post
Building an AI financial market model - Lesson IV In Lesson 3, I introduced the Sliding Window Validation operator to test how well we can forecast a trend in a time series.  Our initial results are
Next post
Calculating Historical Volatility Hi there!   This is one my most popular posts and I would love it if you became an RSS Reader! The inspiration for my S&P500 Volatility