Category Archives for "Research"
Often one runs a optimization of a testing idea, then using some set metrics from these results, one picks a variation to trade. What often comes as a surprise to people, and myself the first time I saw this, is that your optimization runs are often mean reverting. What do I mean by this?
A common way to describe a mean reversion trade is a rubber band that stretches away and then snaps back. Something that Steve, my trading buddy, and I discuss when a trade keeps going against us is that the rubber band has broken. I have never tested that concept. Meaning after N day sell-off, are we now more likely to continue to sell off than bounce? Doing research is not always about trying to develop a new strategy but sometimes it is testing a concept. The concept may lead to a new trading idea.
A couple posts ago, I did the RSI Analysis. This post will focus on ConnorsRSI which I created while working for Larry Connors. When creating the indicator, the focus was on short-term mean-reversion results. We will look at that here but also how does it handle longer-term holds. Since I did not test this when I originally did the work, I was looking forward to seeing the results.
ConnorsRSI is an indicator made up of three components. The first being a 3 period RSI on the closes. The second being a 2 period RSI applied to the current up/down streak. The last being a rank of how big today’s move is. Then a simple weighted aveage is used to combine them. For more details on the calculation and how to use it see this link.
Recently I have been researching longer term hold strategies. I wondered which indicators by themselves would show an edge 3 to 6 months out. I am not looking to create a strategy from the indicator alone but want to know is there a statistical edge with it. Naturally, I started with my favorite Relative Strength Index, RSI.
Two years ago, I wrote an article, The issues with back testing a short stock strategy, about my short strategy and the issues I had with short backtests and shorting. Soon after publishing that article, I stopped trading my short strategy. I like to retest strategies 2 to 3 years after I stop trading them. I will admit that I do not do this with all my strategies because I forget to do so. I am looking to see how the strategy has performed since then and if the reasons I stopped have changed. Maybe it is time to start trading it again. The current market conditions and the fact that I wrote about this strategy gave me the push to remember to do it. So how has my short strategy held up since I stopped?
I recently gave a presentation on Better System Trader about using stops on a breakout strategy. The research produced results I was not expecting and may be surprising to you. The stops tested are
A reader recently asked how to do equity curve correlation. For detailed information on correlation you can read Correlation and dependence or for simpler explanation read Correlation at Math is Fun. For steps on how to do this in Excel, which is where of course I did it, read Correlation at Excel Easy. I will cover here how one can correlation analysis between equity curves.
My previous post The Health of Stock Mean Reversion: Dead, Dying or Doing Just Fine generated good reader’s suggestions on other ways to check on mean reversion health. Let us see what these tests tell us.
Wow, what a tough week. But how unusual has this move been? I had a couple of readers send in some ideas to test. These are always fun tests to do when the market goes crazy but usually they don’t provide enough data points to act upon.
My second post on this blog was a look at mean reversion, Is mean reversion dead? Given I am using a new data provider(Premium Data), it has been almost two years since that post and there have been other articles on this recently, I figured it was time to check again. The research will focus on Russell 1000 stocks since 1995. The test is back to 1995 covers 3 bull markets and 2 bear markets.