tag:blogger.com,1999:blog-261139923818144971.post1347189288996414351..comments2024-03-27T07:58:49.946+00:00Comments on This Blog is Systematic: Some more trading rulesRob Carverhttp://www.blogger.com/profile/10175885372013572770noreply@blogger.comBlogger66125tag:blogger.com,1999:blog-261139923818144971.post-50655293723504221052024-01-25T16:32:25.496+00:002024-01-25T16:32:25.496+00:00Let's say you are trading momentum using a mov...Let's say you are trading momentum using a moving average crossover. You could: say that when the crossover is neutral you are neutral position. This means you will have a long bias in the backtest if the asset tended to go up. Personally, I am fine with this. Or you could demean the forecast using a long run mean for that asset. This will remove the long bias if you are bothered about that. "I've attempted various methods to identify the "neutral point", including backtesting entry points and optimizing for specific metrics," yeah this is all overfitted bollocks.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-29385547507198911642024-01-25T16:22:07.577+00:002024-01-25T16:22:07.577+00:00Dear Mr. Carver,
I came across this discussion an...Dear Mr. Carver,<br /><br />I came across this discussion and found myself facing a similar challenge. I was wondering if I could seek your guidance on this matter.<br /><br />Let's consider a scenario where I have a price series, such as Nasdaq, exhibiting a clear trend. In this situation, the mean/median of any variable I analyze for that time frame tends to show a bullish signal.<br /><br />My question is, what approach would you recommend to identify this "neutral point", which I can then use as a reference for the Q point? <br />I guess the underlying question is: Is it necessary to have the model where 50% of the time it's long as you mentioned in the response to Mathias? <br /><br />I've attempted various methods to identify the "neutral point", including backtesting entry points and optimizing for specific metrics, but I'm concerned about the robustness of these approaches.<br /><br />Your insights would be greatly appreciated. Thank you for your time and expertise.<br /><br />Rgrds<br />FelipeFelipehttps://www.blogger.com/profile/00655824651295811702noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-5067274338936872592024-01-24T16:14:12.256+00:002024-01-24T16:14:12.256+00:00Yes, you could just a quantile of the underlying t...Yes, you could just a quantile of the underlying thing you are then transforming into a Z score. Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-64299740400088839622024-01-24T16:09:25.976+00:002024-01-24T16:09:25.976+00:00Given that a z-score of 0 represents the mean and ...Given that a z-score of 0 represents the mean and not the median of a distribution, and considering the non-Gaussian nature of our data, would you recommend moving away from the use of z-scores altogether? Is there a more appropriate statistical method or transformation that would better capture the central tendency or neutrality point in our specific dataset? Thanks again for your guidance!Mathiashttps://www.blogger.com/profile/03254607639797446190noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-68000306004511913162024-01-24T15:58:00.150+00:002024-01-24T15:58:00.150+00:00So you are deliberately adding an extra parameter ...So you are deliberately adding an extra parameter to your model to introduce a deliberate long bias? (Obviously I think this is a very stupid idea and a complete waste of time) If you use my method then Q=50 will be neutral, eg your models will be trained to be long half the time. Just work out the Q point where you get your neutral Z score (which if it was my model would be Z=0), and shift all the Q points before doing your mapping.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-37213474607290893282024-01-24T15:54:42.526+00:002024-01-24T15:54:42.526+00:00Your suggestions on using quantile measurements an...Your suggestions on using quantile measurements and mapping them onto a uniform or Gaussian distribution are indeed helpful. However, I have encountered an additional complexity in my model that I would like your advice on.<br /><br />However within my framework, a z-score of 0 does not necessarily imply a neutral position. Instead, we determine neutrality by identifying the optimal positive and negative thresholds that maximize a specific performance metric for a specific period, this is how we fit the thresholds. Interestingly, we’ve observed that the midpoint of these optimal thresholds tends to be slightly positive, likely due to a predominance of bull markets in our data’s historical timeframe (commodity futures).<br /><br />Given this scenario, how would you suggest we adjust the transformation of our z-scores to accommodate this shifted midpoint for neutrality? Is there a method to recalibrate the quantile measurement or the mapping process to reflect a neutrality point that is not zero but a slightly positive number? Any guidance on how to integrate this aspect into the forecast scaling process would be greatly appreciated.<br /><br />Thank you again for your time and expertise, i am learning a lot by reading your book and my interest in the topic has been greatly enhanced. Mathiashttps://www.blogger.com/profile/03254607639797446190noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-66379910644204481912024-01-24T15:46:13.249+00:002024-01-24T15:46:13.249+00:00To deal with non Gaussian is trivial, measure the ...To deal with non Gaussian is trivial, measure the quantile (Q) of your forecast vs history between 0% and 100% and then you can eithier use (Q-50)/2.5 as a forecast (which results in a uniform forecast distribution) or map Q on to a Gaussian with mean 0 and std dev 10 so at Q=50 forecast is 0*, Q=10 mapping to -12.8, Q=25 mapping to -6.7 and so on. If you do this I don't see why you would need thresholds (* if a Z score =0 is where you want to be neutral not long or short then you can adjust your distribution easily to achieve this)Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-14933224198650800682024-01-24T14:47:19.193+00:002024-01-24T14:47:19.193+00:00Dear Mr. Carver,
I am currently utilizing your sy...Dear Mr. Carver,<br /><br />I am currently utilizing your systematic trading framework to develop a strategy based on fundamental, mostly non-price based data. My approach involves converting raw data into z-scores using an expanding rolling window, ensuring that future data doesn't influence the calculation of the current week's z-score.<br /><br />Given that most of my data follows non-Gaussian distributions, my z-score thresholds for buying and selling are typically above zero. I am currently struggling with transforming these z-scores into a continuous forecast scale ranging from -20 to 20.<br /><br />My current methodology employs binary rules where forecasts are set to 1 or -1 based on specific z-score thresholds, with all in-between values assigned to 0. This approach, however, doesn't utilize the full potential of a continuous scale.<br /><br />I am considering the use of a min-max scalar for this transformation, but I'm concerned about the distortions it might introduce due to the non-normal distribution of my data. Could you provide insights or suggestions on how best to convert these z-scores into a continuous, scaled forecast? Specifically, how can I refine my approach to generate more nuanced forecasts that accurately reflect the varying strengths of the signals derived from my fundamental indicators?<br /><br />Thank you for your guidance and insights.<br /><br />Best regards,<br />MathiasMathiashttps://www.blogger.com/profile/03254607639797446190noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-32304939147440008842023-03-01T11:33:34.665+00:002023-03-01T11:33:34.665+00:00It makes sense, since using a volatility with a to...It makes sense, since using a volatility with a too long span would create issues with series where price levels today are very different from prices a few years ago (take for example stitched excess return series for gas or hogs). Thanks againyounggottihttps://www.blogger.com/profile/09011475435226933830noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-34442735748605025812023-03-01T11:28:59.390+00:002023-03-01T11:28:59.390+00:00I just use my normal estimation of volatility, whi...I just use my normal estimation of volatility, which is exponential with a span of a month.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-70393689619733861662023-03-01T11:23:15.169+00:002023-03-01T11:23:15.169+00:00Hi Rob. If I understand correctly, for normalized ...Hi Rob. If I understand correctly, for normalized momentum you calculate normalized returns dividing price changes by the rolling volatility of prices (calculated since the start of the time series). Is that correct or do you use a fixed lookback to define price volatility?<br />Thank youyounggottihttps://www.blogger.com/profile/09011475435226933830noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-86841767419976360642022-09-29T07:36:06.102+01:002022-09-29T07:36:06.102+01:00Makes sense. Thanks Rob!Makes sense. Thanks Rob!Jeffrey Chttps://www.blogger.com/profile/10450570364704375574noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-9363676563347180102022-09-28T08:40:11.911+01:002022-09-28T08:40:11.911+01:00It's up to you. I already have a futures syste...It's up to you. I already have a futures system, so I already have an exposure to those rules elsewhere. But if I was only trading stocks, sure I'd probably use a mixture of rules both idiosyncractic and cross asset, just with more of a weight to the cross asset than I'd use at the index level.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-48974265262881750782022-09-28T02:37:02.933+01:002022-09-28T02:37:02.933+01:00I see. So in that case would you suggest keeping a...I see. So in that case would you suggest keeping a small allocation to EWMAC and breakout for the rule diversification benefit? Or would you say the idiosyncratic risk at the individual stock level completely overwhelms individual momentum and we should completely replace those rules with aggregate momentum?Jeffrey Chttps://www.blogger.com/profile/10450570364704375574noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-5096842820374642332022-09-27T09:03:15.909+01:002022-09-27T09:03:15.909+01:00I think the idea of an aggregate momentum rule mak...I think the idea of an aggregate momentum rule makes sense, eg only be long the single stocks when the index is going up. It's something I use myself.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-21645297284205275132022-09-27T02:06:43.649+01:002022-09-27T02:06:43.649+01:00Hi Rob,
I’ve been working on a system using your ...Hi Rob,<br /><br />I’ve been working on a system using your books ST for the framework and SP for the handcrafted portfolio allocations. My exposure will be through stocks and ETFs. I was originally planning to get home country equities exposure through individual companies, then ETFs for the rest, like what you suggest in SP. So my equities allocation would look something like 11 US large cap stocks (1 per sector), 11 US mid caps, a US small cap ETF, then ETFs for various other regions. However, after reading this post where you say that momentum is less effective at more specific levels (especially the individual stock level), I’m not sure if that’s a good idea. The rules I have so far are momentum (EWMAC and breakout) and carry. So would you suggest not splitting it up and just going with ETFs instead? Or maybe individual stocks can do fine when we apply an aggregate momentum rule to them in addition to the time series momentum rules of EWMAC and breakout? Thanks.Jeffrey Chttps://www.blogger.com/profile/10450570364704375574noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-87448652804701493632022-09-05T14:32:49.867+01:002022-09-05T14:32:49.867+01:00Thanks,that make sense!Thanks,that make sense!Wengwghttps://www.blogger.com/profile/18304759125820033277noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-84944938319980568992022-09-05T09:31:47.921+01:002022-09-05T09:31:47.921+01:00Well I do this. I think as long as you're trad...Well I do this. I think as long as you're trading slowly enough, and as long as you lag fills by one day to be conservative, it's okay.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-5660886627852085072022-09-04T18:25:41.603+01:002022-09-04T18:25:41.603+01:00Hi Rob,May I ask you a question about aggregate mo...Hi Rob,May I ask you a question about aggregate momentum and non-synchronous data?<br />I have only daily close price data for instruments,but each instrument may have different trading hours,and close price may not realized simultaneously.<br />Is it ok to calculate normalized returns for those instruments in same asset class,and use your formula RA_t = median(Ra_t, Rb_t, Rc_t, ...),in this situation?<br />Thanks for any thoughts,and looking forward to your new book!Wengwghttps://www.blogger.com/profile/18304759125820033277noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-37143775294995322322022-05-21T08:54:21.880+01:002022-05-21T08:54:21.880+01:00Hi Rob,
How do you know whether to add a trading ...Hi Rob,<br /><br />How do you know whether to add a trading rule to a portfolio? Is there some threshold correlation you use? E.g. only add a new trading rule if it has less than x % max correlation to existing rules<br /><br />Similar question when you have a trading rule and you have multiple variations of it (e.g. different lookback windows). Which ones should you choose (assuming you don’t just cherry pick based on backtest performance)?<br />Anonymous https://www.blogger.com/profile/14019067484620273077noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-66585061202267911582022-05-11T08:48:05.797+01:002022-05-11T08:48:05.797+01:00No because they're utter bollocks.No because they're utter bollocks.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-88639930325953765912022-05-10T23:07:21.122+01:002022-05-10T23:07:21.122+01:00Hi Rob, thanks for the post.
You mentioned the fo...Hi Rob, thanks for the post.<br /><br />You mentioned the following in your post:<br />“the other school of thought within the technical analysis campus is that one should look for patterns, which I'm less enthusiastic about”<br /><br />Can you recommend any books/resources on creating trading rules using patterns? Do you believe this will add diversification to the set of trading rules?<br />Anonymous https://www.blogger.com/profile/14019067484620273077noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-40718832516987505492022-04-11T17:29:59.643+01:002022-04-11T17:29:59.643+01:00I look forward to reading it!I look forward to reading it!anonymoushttps://www.blogger.com/profile/06896306662164790456noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-34790237973670146492022-04-11T17:17:49.757+01:002022-04-11T17:17:49.757+01:00No I haven't changed anything.
FWIW there is...No I haven't changed anything. <br /><br />FWIW there is some research on this question in my new book, which I'm currently writing.Rob Carverhttps://www.blogger.com/profile/10175885372013572770noreply@blogger.comtag:blogger.com,1999:blog-261139923818144971.post-19131078353982606672022-04-11T17:05:48.459+01:002022-04-11T17:05:48.459+01:00The reason might be the reversal of conditions tha...The reason might be the reversal of conditions that gave "rise to carry." Your second question is what I'm struggling with. During the interview I kept thinking of the charts that Chris Cole references in his initial Dragon portfolio paper that we are at a secular low in both volatility and price trend. But, using either of those measures to scale back carry seems like a bad idea. My other thought was to use some measure of central bank accommodation, though this is not well fleshed out. In any case, I was just curious if you'd considered making any changes based on that interview.<br /><br />Chrisanonymoushttps://www.blogger.com/profile/06896306662164790456noreply@blogger.com