Cesar Alvarez

Author Archives: Cesar Alvarez

Slippage and low liquidity stocks

Recently, I have been working on a strategy that trades stocks with low dollar turnover. The initial performance was attractive and I was liking the strategy. But there were two issues that I needed to deal with in the backtesting. How much slippage to add to these stocks. The strategy enters and exits on the open and while looking over the trade list, I noticed some trades entered at the low of the day and exited at the high of the day. From my trading, I knew this would not be a realistic price. Should these cases get extra slippage? What follows is how I try to account for these issues.

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September 30, 2020

Using strength to exit a mean reversion trade

I had a long-time reader, Cristian Franchi, send me a mean-reversion strategy that he wanted me to test and write about.  What caught my attention was the rules differing from what I typically see and use. Different ways of measuring strength of a sell-off and volatility expansion. Along with a different type of exit being used on a mean reversion strategy. Not simply waiting for the bounce.

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Be Careful of Big Years

While doing research on a mean reversion strategy, I was really happy with the Compounded Annual Returns (CAR) of 51%. I was thinking, I may have a new strategy to add to my stable of trading of trading strategies. A big fact I liked was the strategy used no market regime filter.

Then I looked at the yearly returns. The 2020 return through July 31 as 444%! How much did the CAR depend on this year’s numbers?

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The importance of testing different exits

When developing a strategy, exits are often not given a second thought. If you are creating a mean reversion, you may default to using Close greater than the 2-period RSI. If you are trading a trend strategy, you may default to trailing exit using 14-day ATR. You try a bunch of entry filters but rarely try a different exit. Or maybe a slight change in the exit.

If you are having success, with your strategy. You think great and don’t change the exit. If you are not getting anywhere, you think the idea did not work and stop testing.

A slight change in your exit can have a huge impact on the results as was driven into me during some recent research. I am guilty of not be as thorough in my testing of exits as I should be. Hopefully, this will convince you to look at them more at the beginning of your research.

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How to turn off a strategy using historical volatility

A very common question I get, is “when should I turn off a strategy?” Given the very volatile markets we have had the last few months, I can relate. Some strategies can thrive in these high volatility markets. While others can suffer.

In the June 2020 issue of Technical Analysis of Stocks and Commodities, Perry Kaufman writes an article about using the historical volatility of the equity curve to decide when to turn off a strategy. I always read Perry’s articles because they are full of good ideas and this was another one that I liked and had not tried before.

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March 11, 2020

Trading Multiple Strategies

Using strategy diversification is one of the easiest ways to improve the performance and reduce risk of your overall portfolio. Trading one strategy is risky because you never know when it may stop working or simply go into a period of under-performance.

Given two strategies to trade, the questions I have are, what is the performance of trading them together? What percentage of the total portfolio should be allocated to each strategy? How often should I rebalance that allocation?

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