January 20, 2016

Revisiting Strategies

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?

Rules

I will not be sharing the rules to this strategy. I may one day start trading it again. The strategy shorts strongly trending stocks that are over bought in the short term. Here is a recent set up.

160120a

These are difficult stocks to short. The only change I made from two years ago was to change the trading universe to Russell 3000 stocks. About two years ago, I moved all my trading to using Norgate Data and using there index constituent data. Besides that small change, no other rule was changed.

Results Before I Stopped Trading

160120b

The 2012 and 2013 did not produce great returns but these were strong bull years. If you read my earlier post, the lower performance was not the reason for my stopping to trade this strategy. It was dealing with not being able to borrow, large losses on a single stock and short interest.

Results Since I Stopped Trading

160120c

The last two years have seen a pick up in performance with low drawdowns. I would say that these are good numbers given the strong bull market we have been in. Part of me wishes that I was trading this the last two years.

Final Thoughts

When revisiting a strategy, I want to see how it has performed and if the reasons why I stopped trading it have changed. Will I trade this strategy again? Probably not. All the issues that caused me to stop are still there. But having a short strategy in a market likes this is very tempting. Would you trade it again?

Backtesting platform used: AmiBroker. Data provider:Norgate Data (referral link)

Good Quant Trading,

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Matt - January 20, 2016 Reply

It seems like using options to trade the strategy would address all three of your concerns.

    Cesar Alvarez - January 20, 2016 Reply

    It would cover some but not all. My guess is that not all the stocks will have options. Some of them will have large spreads. I should take a look to confirm.

Bing - January 20, 2016 Reply

Cesar, what do the DD5 figures mean?
Also, do you periodically re-optimise the parameters of the strategies so bring them “up to speed” when performance tapers off, or do you stick to the same parameters and just make the decision as to whether to trade it or not. Amibroker’s automated WF does provide the capability to examine whether periodically reoptimising the parameters provides real benefits or not.

    Cesar Alvarez - January 20, 2016 Reply

    Those are the 5 worst drawdowns. I try not to reoptimize the parameteres. In general I don’t find much benefit. I don’t do much WF testing.

Ariel Silahian - April 13, 2016 Reply

Cesar, I’m a big fan of your books and papers, and I’ve been using all your studies to create my own strategies. Said that, I strongly believe that these indicators are no longer valid. They measure “people” behaviors and feels, and as you know, today’s market is everything but people. Stock market in its majority is ran by algos, using electronic trading and High Frequency Trading…
So, anything with technical indicators have been loosing steam.

Ariel Silahian

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