Category Archives for "Research"
March 3, 2021
- in Mean Reversion , Research by Cesar Alvarez
Adding candlesticks to mean reversion setup
My preferred chart style is a candlestick chart but I have never investigated candlestick formations to see if they can help provide an edge in my trading. I recently ran into this blog post, Do Candlesticks Work? A Quantitative Test Of 23 Candlestick Formations, where he did his own investigation. Even better he shared the code for the formations in AmiBroker which would make it a lot easier. You can get my version of the code below.
Using the mean reversion strategy from my previous post, I wanted to know if any of the candlestick formations could improve the results.
January 20, 2021
- in Mean Reversion , Research , Stocks by Cesar Alvarez
Avoiding Gap Trades
Should you avoid trades that have recently gapped? What if you are trading a mean reversion strategy and a stock has recently had a large gap? Is that a good trade to take? Avoid? Does it depend on the direction of the gap? I did research on this about 15 years ago. Let’s see what the current research says.
December 11, 2020
- in General , Research by Cesar Alvarez
Using Probability Cones to Test for Strategy Death
The most common question I get is how do you determine that a strategy is no longer working. It is also the question that I don’t have a good answer for. I have written several posts about this: Trading the Equity Curve, How to turn off a strategy using historical volatility, Broken Strategy or Market Change. During his How to detect a failing trading strategy presentation, Kevin Davey discusses how he uses probability cones to determine when to stop trading a strategy. I had not investigated this concept and was very intrigued.
October 28, 2020
- in Mean Reversion , Research , Stocks by 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.
August 26, 2020
- in Mean Reversion , Research , Stocks by Cesar Alvarez
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?
July 22, 2020
- in Mean Reversion , Research by Cesar Alvarez
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.
June 24, 2020
- in General , Market Timing , Research by Cesar Alvarez
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.
April 22, 2020
- in Market Timing , Research by Cesar Alvarez
Market Cap vs. Crash Severity
Has the market sell-off and subsequent bounce treated all stocks the same? A good portion of the bull market move from 2009 to 2019 has been led by the big-cap stocks. Did they hold up better during the March sell-off? What about with the bounce? Did the smaller-cap stocks have a bigger bounce?
March 25, 2020
- in ETFs , Research , Stocks by Cesar Alvarez
Correlations go to One
There is a saying: “in bear markets correlations go to one.” I wanted to see how true that is for both stocks and a basket of ETFs. Now they don’t go to exactly one, not that I expected that, but they take some large steps towards one.
March 11, 2020
- in Research by Cesar Alvarez
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?
