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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Should one trade high or low volatility stocks?

If one is trying to develop a multi-month hold stock strategy, is it better to focus on high or low volatility stocks? For a long time, I have wanted to add a longer term stock strategy to my basket of strategies that I trade. I do not expect this strategy to perform as well as my shorter term strategies but work as a complement to them

Low volatility or high volatility? Short term trading strategies tend to do best when they focus on high volatility stocks. Will this be true for a longer hold strategy?

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Backtesting is Hard

Why don’t I make more frequent posts? The easy answer is backtesting is hard.

A test has three parts to it. First, coming up with the idea. I have more ideas than I can test. I have a notebook full of ideas. The hard part here is picking one. Second, writing the code and running it. This takes me a couple of hours to a couple of days to do. Writing code is the fun and mostly easy part, though sometimes it can be insanely hard. Third, is verifying the result are correct. It is the last step that can takes days to weeks to do. Then writing the post takes a couple of days.

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Ulcer Index: An underutilized portfolio metric

About two years ago, I started using the Ulcer Index as another evaluation metric for portfolio backtests. I like how it captures both drawdown and drawdown length. It helps differentiate similar looking portfolios using the common metrics of Compounded Growth Rate, Share Ratio, and Maximum Drawdown. My plan was to write a blog post about it and then add it to the metrics I show on the blog. The blog Flirting With Models, found through the quant mashup Quantocracy, just made a great post on it which I highly suggest you go read: Looking into the Ulcer Index. They did a great job and saved me a post. I will show this metric on future portfolio tests.

How to beat the market by throwing darts

During some recent research I noticed that picking random stocks in the SP500 produced returns much better than I would expect. This observation was recently echoed by another researcher that I know. Could one make a market beating system by basically randomly pick stocks?

The research that led to this observation was on market timing. Can having a good market timing rule, a profit target and stop loss be enough to randomly pick stocks and beat the market. The answer may surprise you.

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Are S&P500 Stocks Moving Less In Tandem?

I saw this interesting graph the other day on The Big Picture and wanted to know more. Are stocks really moving less in tandem? Could there be another explanation for what is going on? Researching the numbers behind the chart may provide some interesting insights.

From: WSJ

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DTAYS Weekly Breakout Strategy

After my interview on ‘Don’t Talk About Your Stocks’, (site no longer exists)’ Andrew pointed me to a strategy he is trading called the DTAYS Quantitative Growth Fund. He was curious to see back tested results. Always looking for new ideas to write and tested, I jumped on it.

Unfortunately, the results will not be exactly as he trades it. Andrew uses the IBD50 as his trading universe. As is the bane to stock researchers, I do not have historical data on the IBD50. One could create some great models using that data. Instead, the test will be on the standard stock universe

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Podcast interview on ‘Don’t Talk About Your Stocks’

Last week I was interviewed by Andrew Selby of Don’t Talk About Your Stocks. We covered lots of topics in the 45 minute interview. We covered my trading mistakes, why you need a trading buddy,  matching your trading style to your personality, and many more topics.

Link: http://www.donttalkaboutyourstocks.com/dtays-016-cesar-alvarez/

If you have any questions from the interview, post them in the comment section of this page.

How much does not having survivorship free data change test results?

Over the last month several people have asked me how important it is to have survivorship-free data. For any researcher this is an important question to understand how the different data can change your results. We will be exploring three potential data issues: as traded prices, delisted stocks (survivorship-bias), and historical index constituents (pre-inclusion bias).

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S&P500 Monthly Rotation-Readers’ Ideas

The ‘Intermediate Term Stock Rotation Strategy Using S&P500 Stocks’ post generated lots of reader suggestions on what to investigate further.

The ideas we will investigate are:

• Monthly rotation (instead of quarterly)
• Using an additional filter to make sure the stock is healthy. These include
  • Close above 200 day moving average
  • Close above 50 day moving average
  • 50 day moving average above 200 day moving average
  • Stock return over look back period is positive
  • In the last 10 days the stock has made a 1 month high
  • In the last 10 days the stock has made a 3 month high
  • Maximum loss stops

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