Here is one last look at the unbounded DV-2 strategy by CSS Analytics to demonstrate the larger concept of Equity Curve Switching. From the last post (here), I took the two best equity curve results, namely those from the Raw DV-2 (blue) and the Opposite-Direction (purple) strategies, and then overlaid a simple switching routine based on the higher short-term rate of change among the two.The result is the orange equity curve (simple, frictionless returns). Obviously, this type of system-level trading overlay will work best when the alternative curves present persistent offsetting periods of over/under performance.
In that last follow-on DV-2 post, I referenced the importance of "knowing your trading environment." Now imagine a similar system to the one described above that perennially checks and compares the performance of basic trending, break-out and mean-reverting strategies. In this regard, a good recent companion thought piece to this post may be found over at MarketSci on the State of Mean-Reversion Systems.
I've about beat the unbounded DV-2 indicator to death at this point (with respect David)! In the future I will work with the bounded variant.Note: This post was originally published as an ETF Rewind 'subscriber-first' article delivered over the weekend. This will be my new practice to provide added value to my members.
6 comments:
Jeff, is it possible that you could specify your ROC measure that determined when you switched?
"the higher short-term rate of change among the two."
I love this trading the equity curve series Jeff. Well done.
Thanks Wood -- In this case I used a simple Last Price/ Average(N Periods). The strategy worked across a fairly broad short set of N's. However, the main idea is to think about applying relative strength methods to your equity curves in general rather than specifying a specific formula here.
Jeff, I have tested your idea with the daily follow through concept. I wanted to switch between mean reversion and trend following so I build the equity curves of "going long if S&P500 daily perf > 0" and "going short if S&P500 daily perf > 0".
Then I defined your short term rate of change and switched to the strategy with the higher rate of change. The weird thing is that it fails pitifully if I am using a short term time window (like 20 days). The combined equity curve is worse than the worst of the initial equity curves.
If I increase the time window, performance increases (almost linearly).
Can you precise your concept to allow short term rebalancing ?
Hi Shivar, I suspect you are headed in the right direction, but may consider reconfiguring your trend-method formulation. Think of trend-systems you would actually trade, and start with that. Best, Jeff
Jeff,
I was wondering if you tried this approach as well with more more systems. Like 100 or so...
Regards,
Dennis
Hi Dennis, I use it for about a dozen at a time. More on this in future posts. Best, Jeff
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