Visual Introduction to Algorithmic Trading

Learn how to evaluate investment strategies with a practical example based on the Apple stock price history. How does Buy & Hold compare to Simple Moving Average Crossover?

Questions

  • Which type of variables are gathered in stock market datasets?
  • How has Apple’s stock performed over the last few years?
  • Which technique can be used to evaluate the performance of a stock?
  • What can be inferred from the Buy & Hold strategy applied to Apple’s stock?
  • What does the Simple Moving Average (SMA) Crossover strategy indicate for potential investors?
  • Which measure can be used to evaluate the performance of a trading strategy?

While you read this article, remember that you can learn how to program the analysis and visualizations you see with our step-by-step programming tutorials.

Premise

In today’s fast-paced financial world, understanding stock market movements and making informed investment decisions is paramount.

Through the analysis of Apple’s stock data, this article explores common investment techniques:

  1. Investment strategies
    1. Buy & Hold
    2. Simple Moving Average (SMA) Crossover
  2. Backtesting methodologies for strategy evaluation
    1. Summary table
    2. Dashboard visualization

This article aims to provide clarity on these strategies and guide investors in making data-driven decisions.

No financial advice is provided in this article. The information provided is for educational purposes only.

Data

The dataset under examination contains historical stock market OHLCV (Open, High, Low, Close, Volume) data for Apple. Each row represents trading data for a specific day, with columns detailing the opening, high, low, close prices, and volume of stocks traded.

This data offers the possibility to analyze the stock’s performance over time. The dataset was sourced from yfinance, a popular library for extracting financial data.

Dataset. Historical stock market OHLCV from Apple
Dataset. Historical stock market OHLCV from Apple

Analysis

Buy & Hold Strategy

The ‘Buy & Hold’ strategy, often considered the cornerstone of investing, advocates for purchasing stocks and holding onto them regardless of market volatility.

The visualization presents Apple’s stock closing prices (left primary y-axis) since 2022. On the secondary y-axis, the cumulative return is charted, showcasing an almost 10% profit an investor would have accrued had they purchased the stock and retained it.

Had the investor cashed out in January 2023, they would have incurred a loss of 30%. This fact highlights the importance of timing when it comes to investing.

Figure 1. Apple stock price evolution over time | Interactive Chart

Simple Moving Average (SMA) Crossover

The Simple Moving Average (SMA) Crossover technique is a popular stock market strategy. It involves two SMAs, one short (10 days in this case) and one long (20 days).

When the short SMA(10) crosses above the long SMA(20), it’s a buy signal, indicating a potential upward trend. Conversely, when the short SMA dips below the long, it’s a sell signal, pointing towards a potential downward movement.

The depicted chart vividly illustrates these crossover points, guiding potential buy and sell decisions.

Figure 2. Investment strategy trades: Simple Moving Average Crossover | Interactive Chart

Backtesting Investment Strategies

Backtesting is a crucial step before deploying any stock market strategy. Using historical data helps validate the strategy’s potential profitability.

In this analysis, the SMA Crossover strategy is backtested, with results indicating its returns (6.69%) versus the traditional Buy & Hold (8.87%) approach.

Backtesting basic report on investment strategy
Figure 3. Backtesting basic report on investment strategy

In this case, the SMA Crossover strategy underperformed the Buy & Hold approach. However, this is not always the case because many factors influence the profitability of a strategy.

At the end of the day, it’s up to the investor to decide which strategy to pursue based on a variety of factors*, including risk tolerance, backtesting period, and investment goals.

*They’ll be detailed in another article.

Additionally, the following visualization provides a comprehensive overview of how the investment would have fared over time, juxtaposing the actual stock price with the hypothetical investment trajectory based on the SMA Crossover strategy.

It indicates key metrics such as the equity curve, drawdown, and returns (profit/loss), providing a holistic view of the strategy’s performance.

Backtest dashboard report on investment strategy
Figure 4. Backtest dashboard report on investment strategy

Conclusion

Crafting stock market strategies and their implications is an art because of the many factors at play and the inherent volatility of the market.

However, this article provides you with an initial study of historical data, combined with a simple understanding of techniques like Buy & Hold and SMA Crossover, which can offer clear insights about the stock’s performance.

Next Steps

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Jesús López

Statistics, cloud and data programmer @datons

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