PORTFOLIO SELECTION AND MANAGEMENT USING RISK/REWARD RATIOS

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duke56468 683 posts msg #92759 - Ignore duke56468	5/14/2010 11:06:10 PM Kevin..Thanks for sharing your filter and your talent. Is the quarterly rebalance Dec. 31, Mar. 31 etc. or is it any three month period? It feels a little uncomfortable having no stops for 3 months and no diversification, but after reading this thread several times I think I'll give it a try.
Kevin_in_GA 4,599 posts msg #92826 - Ignore Kevin_in_GA	5/16/2010 7:21:20 PM Here's an update on my efforts to further backtest this filter. The ETFs used here track their underlying indices fairly accurately, but only go back as far as mid 2003. Instead, I used the monthly data for the indices themselves, which allow for extending the backtesting time frame to July of 1996 (an extra 7 years, during which we had a phenomenal run up in the S&P, then the Asian currency meltdown and the dotcom bubble bursting). Definitely a highly volatile period that would challenge any decent investment strategy. Since SHY did not exist back in 1996, I simply put the investment in cash instead (I gave it 0.1% gain per month, which is an underestimation for money market accounts during that time, but that's OK). I also looked at the quarterly rebalancing by taking the average of the rolling 3 quarter data, rather than just using the traditional business quarter definitions - this then allows for the same number of data points as the monthly, just averaged into a composite quarterly rebalancing performance (probably more accurate). Now, using a 100% weighting on the 3 month relative strength, and looking back over 165 trades since 7/1996 the data is as follows: Monthly: Winning Trades: 119 Losing Trades: 46 Win %: 72.2% Return since 7/1996: 376% SPX return since 7/1996: 85.4% Quarterly: Jan, April, July, Oct: 268% return Feb, May, August, Nov: 214% return Mar, June, Sep, Dec: 433% return Average return since 7/1996: 305% SPX return since 7/1996: 85.4% This longer backtest shows that monthly rebalancing is the best approach (opposite of what I posted earlier ...). Personally I am most comfortable trading this filter on a monthly basis, so this is not bad news as far as I am concerned. There is not as large a difference as one might have expected, but it was essentially impossible to beat the SPY buy-and-hold during the late 1990's before the 2001 crash. Up to 3/2001 the buy and hold approach had returned 134% versus only 70% for this approach. Using the indices results in different overall returns, as would using VWO versus EEM, or IEF versus SHY, etc. Key takeaway from this for me is that regardless of which specific ETF, rebalancing timeframe, or backtest length, this approach consistently outperforms the market, usually by a large multiplier. Most of the real gains have come since 2005, but that may simply reflect changes in the overall market - frankly I am happy that it is performing better now rather than the reverse.
hmsb4494 81 posts msg #92832 - Ignore hmsb4494	5/16/2010 9:05:36 PM I am playing around with the idea of trying to trade which ever of the ETF's is on top from the monthly rebalancing, using Kevin's pure price based filter. any comments or ideas???
hmsb4494 81 posts msg #92833 - Ignore hmsb4494	5/16/2010 9:14:38 PM Now, using a 100% weighting on the 3 month relative strength, and looking back over 165 trades since 7/1996 the data is as follows: Kevin---why the 100% weighting on the 3 month relative strength---etfreplay backtests show the the 50% 3 month and 50% 20 day outperforms the 100% 3 month
Kevin_in_GA 4,599 posts msg #92843 - Ignore Kevin_in_GA	5/17/2010 7:04:15 AM Now, using a 100% weighting on the 3 month relative strength, and looking back over 165 trades since 7/1996 the data is as follows: Kevin---why the 100% weighting on the 3 month relative strength---etfreplay backtests show the the 50% 3 month and 50% 20 day outperforms the 100% 3 month ****************** As I had posted earlier in this thread, their selection is based on rank, not absolute score, with any ties going to the one with the better longer term relative strength. I also posted a manual backtesting of these ETFs using 100% 21 day, 100% 63 day, and 50/50 split. The 100% 63 day (3 month) scored the best at both the monthly and quarterly rebalancing. Either way, the prinicple of using relative strength to manage a simple portfolio like this results in stellar performance when compared to the overall market over the same time period.
duke56468 683 posts msg #92849 - Ignore duke56468	5/17/2010 11:22:04 AM Kevin...so on the last trading day of the month, run the filter with symlist(spy,eem,iwm,shy)and set{alpha,relative strength(SPY,63)}, or is it still... set{alpha, relative strength(SPY,20) + relative strength(SPY,63)} I'm confused.......NO WAIT..maybe I'm not........OK ya I am.
Kevin_in_GA 4,599 posts msg #92852 - Ignore Kevin_in_GA	5/17/2010 12:54:42 PM Duke: Not really all that confusing - either one of those settings tells you that the ETF to buy right now is IWM. At the end of this month, SHY may be the pick, but let's not jump to any conclusions until the market has a chance to do whatever it is going to do. Based on my backtest results posted here (the ones I did by hand using various relative strength settings, combos, and rebalancing periods) I will be using the simple 63 day RS and monthly rebalancing. Personally, I would also like to see a volume increase (buying, not just total volume) accompany any relative strength increase. I have written additional code for this, and will be happy to share it if people are interested. The filter is more complex, but the output is simple and easy to interpret.
duke56468 683 posts msg #92859 - Ignore duke56468	5/17/2010 2:08:20 PM Kevin_in_GA - Ignore Kevin_in_GA 5/17/2010 12:54:42 PM Personally, I would also like to see a volume increase (buying, not just total volume) accompany any relative strength increase. I have written additional code for this, and will be happy to share it if people are interested. The filter is more complex, but the output is simple and easy to interpret. I'm guessing we would all be interested in the filter, I for one would be.
Kevin_in_GA 4,599 posts msg #92860 - Ignore Kevin_in_GA	5/17/2010 3:56:21 PM I'll post the most recent "401k" filter in a new thread, but basically the idea regarding volume is based on several academic studies (and some common sense) that say that an upward move on declining total volume (which would usually also mean on declining buying volumes as well, but not always) is not sustainable, and might be an early indication of weakness. Just to let you know, I posted essentially the same code in this filter thread a while back: http://forums.stockfetcher.com/sfforums/?q=view&fid=1002&tid=84703&qrid= Kevin
hmsb4494 81 posts msg #92865 - Ignore hmsb4494 modified	5/17/2010 9:52:56 PM Kevin---have you seen this use of OBV??? Formula for improved On Balance Volume Cumulative total of (volume * ((high-open) / (high-low))) - Cumulative total of (volume * ((open-low) / (high-low))) "What we are doing here is assigning a percentage of the volume to upward and downward movement based upon the percentage of price movement in the same direction". You can find the whole study here with charts: http://scientifictrader.com/volume.htm Can someone code this?

StockFetcher Forums · Filter Exchange · PORTFOLIO SELECTION AND MANAGEMENT USING RISK/REWARD RATIOS

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