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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Market will be up 9.7% in 3 months!

When this sell-off indicator triggers, it is correct 100% of the time! On average the market is up only 2.6% in 3 months.

OR NOT!

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Inverse Volatility Sizing Index

In my last post, Inverse Volatility Position Sizing, I tested inverse volatility sizing on a monthly rotation strategy. I saw very little difference in the rest results versus equal position sizing. I was talking to a trading friend about the research and how I was surprised at how there was not any difference in the results. He suggested creating an index using this method.

Now, this sounded like an idea with good potential. And even better it should be easy to test since I had the code written already.

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Inverse Volatility Position Sizing

Recently I’ve had several of my consulting clients come with a strategy that uses Inverse Volatility Position Sizing. The basic idea is that the more volatile positions have smaller size while the less volatile ones get a larger size. I have always been a fan of equal position sizing for several reasons. One, it is simple to do. Two, it is one less variable to optimize on and thus overfit on. Three, I rarely see much change in the metrics I care about when using more sophisticated algorithms.

Inverse Volatility Position Sizing is said to slightly reduce returns but has a big decrease in drawdowns and an increase in Sharpe Ratio. Time to test and see if that is true.

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Trend-Following Plus Momentum in ETFs

In a previous post, Trend-following vs. Momentum in ETFs, I compared trend-following and momentum to see which produced better results on a basket of ETFs. In the post, I mentioned combining trend-following and momentum into one strategy to see if combined they can beat buy and hold more often.

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Trend-following vs. Momentum in ETFs

In Tactical Asset Allocation (TAA) or Dual Momentum (DM) strategies, they often will use trend-following or momentum to decide whether to invest in asset or not. I have two questions. One, how often does either trend-following or momentum out-perform buy and hold? Two, of the two which one out-performs the other more often?

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Exiting using limit orders

Most of us focus our research time looking to find better entries. We don’t spend enough time thinking about our exits. I am definitely guilty of this. A popular way to enter a mean reversion trade is by using a limit order. I use that on the strategy on RSI2 Strategy: Double returns with a simple rule change post.

The exit on that strategy is on the open. Many people don’t like exiting on the open because of the volatility and the belief that you will get a bad fill. What if we exit instead using limit orders? I tested this idea years ago. Time to revisit an old idea.

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The Simplest Momentum Indicator

We all have our favorite momentum indicators. One of mine is percent off 1 year high. This requires 252 data points and comparisons, plus a division. Another one is the 200-day moving average. This requires 200 closing prices, 199 additions and a division. A simple momentum indicator is Rate of Change which is the return of the asset of the last N days. This requires two prices and a division to calculate. That is simple. In this post I will show one that requires just one price and no math.

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Monthly Rotation – Closeness to $10

It is funny that my last post, Brazilian Jiu-Jitsu & Trading – Shiny New Toy, because this post is definitely chasing a shiny toy. I was reading the August 2019 Technical Analysis of Stocks & Commodities issue and came across the article “Swing Trading 10-Point Breakouts.” The basic concept was looking for stocks basing under a multiple of $10, then buy when it closes about that multiple. For example, the stock is trading at $29.50. Then closes at $30.25, buy it. I am thinking there is no way this can work. My curiosity got the better of me and I was off chasing the Shiny New Toy.

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Brazilian Jiu-Jitsu & Trading – Shiny New Toy

A very strong parallel between Brazilian Jiu-Jitsu (BJJ) and trading is the chasing of the shiny new toy. In BJJ, we often want to learn the new submission (Peruvian Necktie or Snake in the Grass Choke) we saw on YouTube. Or the new type of guard (Lapel Guard or 50/50 Guard). In trading, this is chasing the new technical indicator or new position sizing method or new strategy we read on some blog.

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