August 25, 2014

What I am reading: 8/25/2014

Recent articles that I found interesting and made me think.

 

VIX-Adjusted Momentum

The addition of many small details can make a big difference in seemingly simple strategies. I often like to use cooking analogies, and so I like to think of tomato sauce as a classic example: it contains few ingredients and is simple to make but difficult to master without understanding the interaction between components. Trend-following strategies are no different: anyone can create a simple strategy, few can master the nuances.

 

Do Risk-Adjusted Returns Matter?

The firm’s latest piece looks at smart beta and a host of factor investing data. One factor they looked into was the small cap anomaly. Past research has shown that small cap stocks have outperformed large cap stocks over longer time frames. Research Affiliates determined that this actually isn’t the case:

 

The Remarkable Truth about 52-Week High Stocks

On Wall Street, there are many highly publicized metrics that can trigger an emotional response in investors. The “52-week high” signal is a great example. It is a widely reported (e.g., Barron’s, WSJ, MarketWatch) and easily noticed statistic. Stocks at 52-week highs are at their peak versus historical values, and this is, presumably, valuable information. Also, peaks per se are salient, almost by definition, and so we tend to pay a lot of attention to them.

 

The Market Has Not Seen a Strong Up Day for Longer Than It Has Not Seen a Strong Down Day

Older post. We have recently seen the 2% down day but not a 2% up day.

It is a fact that the S&P 500 hasn’t had a -2% drop in the last 68 days but it also hasn’t had a 2% rise for 193 days. The market has given bears plenty of room to escape.

 

 

 

Frustrated by not being to test your own trading ideas? My AmiBroker & Backtesting 101 course starts in 2 weeks and there is still space left.. Click here to find out more.

 

Enjoy,

Cesar

August 11, 2014

Simple Ideas for a Mean Reversion Strategy with Good Results

A reader sent me some trading rules he got from a newsletter from Nick Radge. He wanted to know if these rules really did as well as published in the newsletter. They seemed too simple to produce such good results. This is a basic mean reversion or pullback strategy. The strategy as presented was long and short and went on margin but he wanted to know how it did the long only since he did not short. After contacting Nick Radge at The Chartist, I confirmed with him it was OK to publish these rules.

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July 14, 2014

Premium Data from Norgate Investor Services Review

THIS REVIEW IS OLD. READ THE NEW REVIEW: Norgate Data Review

Old Review below.

I am frequently asked what data provider I use. A year ago my data provider was CSI Data. Then I heard about Premium Data from Norgate Investor Services and the one feature that enticed me to look at them closer: historical S&P500 index constituent data. At that time, I was maintaining the data by hand. Each month I would have to determine which stocks had been added or deleted from the index. I would need to look for name changes in the current and historical list. Not a hard task but time consuming and easy to make mistakes. The thought of not having to do this was very enticing.

This review will focus on US Stocks and AmiBroker integration. Premium data has data for the Australian and Singapore markets, integrate with multiple other platforms and have forex and futures data. For more information go to Premium Data from Norgate Investor Services.

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July 7, 2014

Low Volatility Stocks: 20%+ CAGR Portfolio

Continuing on from our previous posts and research, Should one trade high or low volatility stocks? , Stops and trading high vs low volatility stocks, and Low Volatility Stocks and Profit Targets, we are now testing how these results translate to a portfolio. I pick one variation from each of the tables from the Low Volatility Stocks and Profit Targets. From that one a variation we create a portfolio with a maximum of 10 stocks.

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June 30, 2014

What I am reading: 6/30/2014

Recent articles that I found interesting.

We’re all Smart

When everyone in your field of choice is intelligent it’s much harder to separate yourself from the crowd.  The paradox of skill is what makes it so difficult to beat the market over time.  Finding undervalued assets isn’t as easy today as it was in the past because there are more smart people who know where to look. …

Trend following does not work on stocks

There’s a good reason why most professionals who apply models similar to trend following to stocks call them momentum models. It’s not just a clever rebranding, it’s really a very different game. To blindly cling to trend following as a religion, disregarding any real world evidence and attacking anyone presenting ideas that differ to the trend following mantra is not only unprofessional, it’s outright dangerous….

Is your risk random?

Your trading model might have a random risk element and you might not even be aware of it. In particular longer term models need special care to avoid ending up with random risk. …

Where Have All the Traders Gone?

What is causing the plunge in trading volume (and volatility)?

 

June 2, 2014

Four good reads from the past week

Articles I enjoyed from the past week.

Sophisticated versus Effective

In any field where complexity is part of the discipline (think: finance, technology, etc.) there is a temptation to appear more sophisticated than others. More specifically, the idea is to appear to know the information that other people do not know and to have a certain cleverness about your approach and how you look at problems.

 

Absolute Returns LOL

If your so-called “Absolute Returns” hedge fund crushed it over the last 18 months, I have two pieces of news for you: A) it’s not really an absolute returns vehicle after all and B) it’s going to crush you when the worm turns, regardless of what you’re counting on it to do.

 

Volume and Volatility: Why Many Traders Have Not Been Making Money Lately

Here’s an update of a 2009 post, showing how daily volatility in the S&P 500 Index varies as a function of daily volume.  Specifically, we’re looking at daily true range in percentile terms as a function of hundreds of millions of shares in SPY.  What we can see is that, as volume comes out of a market, movement also becomes less.

 

600 Days Without a 3% Daily Change

It’s been a long time now since the S&P 500 had a big change in a single day. You have to go back to November of 2011 to find the last day that the S&P 500 rose or fell by 3% in one day. Since 1950 there have been 200 trading days out of 16,202 in which the S&P changed by 3% or more, which implies that we get one 3% day for every 81 days.

 

Testing my next idea is taking longer than expected. Blog post next week on the test.

May 19, 2014

Stops and trading high vs low volatility stocks

In my last post, Should one trade high or low volatility stocks?, we placed stocks into three volatility buckets and compared their performance. Several readers pointed out that using a fixed percentage stop made it more likely for high volatility stocks to hit the stop thus not performing as well. Readers suggested using an Average True Range stop or a time stop. We will explore those two stops and see how the volatility buckets compare.

Individual Trade Quality

Before we get to the tests, I need to explain a new metric I will be using. At Connors Research we use Individual Trade Quality, ITQ, when we were comparing results of non-portfolio tests, such as these tests. The simple way to understand ITQ is it analogous to Sharpe Ratio in a portfolio test. To get more details on ITQ see How to Measure the Individual Trade Quality of Your Strategy.

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