Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Dangerous Nonsense: Trading the Equity Curve and Market Timing

InvestorEducation / Risk Analysis Dec 02, 2014 - 03:23 PM GMT

By: Submissions

InvestorEducation

Anthony Garner writes: Using a simple system it is said to be possible to achieve a better risk adjusted return than would be achieved by buy and hold. Maximum drawdown may be less severe and standard deviation may be lower.

Much is made by the retail investment community (and indeed others who should know better) of the advantages of algorithmic market timing based on limited testing over limited timeframes and over an even more limited number of instruments.


Systematic market timing only works in the aggregate, over a wide variety of instruments and over a long time frame.  I am very aggrieved when I see articles which use a small number of instruments, conduct very limited testing and conclude that “it works”.

Asset allocation “schemes” are amongst the worst offenders: commentators perform limited tests on 4 index trackers and conclude that applying some simple system will soundly beat the performance of every fund manager (and his uncle) who has ever lived.  Often such schemes use a single fixed monthly date to re-allocate between the sectors.  Often they tout the sort of performance metrics which may be achieved in the long term by one manager in a million, and then perhaps as much by chance as anything.

It is nonsense, pure and simple.

Much the same applies to “trading your equity curve”. The equity curve (or output) of a systematic investment strategy can itself be “market timed”. In the same way that you can exit the S&P 500 when it dips below the much vaunted 200 day moving average and re-enter when it re-crosses on the upside, you can stop and start your own systematic trading on the same basis.

But much the same considerations apply. If you have a single trading method, it’s going to be a toss-up: sometimes it will work sometimes it won’t.  If you trade a large number of systems you stand a better chance of benefitting overall from such a technique.

I will give one small example. The results set out below represent a monthly momentum system back tested on a portfolio of 1,000 US stocks for the period 1st January 1997 to date. The system used was a 20 stock enhanced version of the Smart Beta Stock Momentum System (http://anthonyfjgarner.net/quantechinvestments/smart-beta-stock-momentum-strategy/). The system used for each test run was identical in all respects except for the rolling date upon which re-allocation took place.  “Without cut out” represents the equity curve without using market timing. “With” represents the identical system but trading ceases when the 65 day momentum of the equity curve goes negative and re-commences when it re-enters positive momentum over the said look back period.

As can be seen, there is surprising variance in the results when you bear in mind that the only difference in the 31 test runs is the re-allocation date. Nonetheless there is evidence that some advantage may be gained by applying a stop/go form of market timing if it is applied to enough different systems/equity curves.

Clearly this very limited series of tests proves nothing. But it may encourage further research.

By Anthony Garner

http://anthonyfjgarner.net

Anthony Garner is a British national based in London. He left investment banking in 1992 in favour of a long cherished aim to work for himself and since 1995 has been trading financial markets for his own account, as well as having established, run or acted as consultant to a number of hedge funds. For some years now his interest has concentrated on designing, testing and trading mechanical strategies, since his years inside the financial industry convinced him that for the majority, the discipline of systematic trading is a better way to go. 

Anthony is CEO of Malplaquet LLC which engages in proprietary investment and trading in the international equity, bond and futures markets. The group was founded in 1998.

He has acted as consultant to IFIT Advisory AG on mechanical trading systems and the futures markets with reference to the Contrapuntal Fund SP, a systematic global macro fund.

He is the author of “A Practical Guide to ETF Trading Systems” published by Harriman House and has also written articles on trading and investment for a number of publications. After education at Westminster School, Oxford University and The College of Law, Anthony qualified and practiced as a solicitor with the leading London law firm of Slaughter and May, specializing in company and commercial law. Anthony then moved to Swiss Bank Corporation International (SBCI), the investment banking arm of Swiss Bank Corporation (now merged with UBS) first as an in-house attorney and then as an analyst, producing institutional research on South East Asian stock markets including Hong Kong, Singapore and Malaysia. Anthony spent a year in Tokyo assisting with the establishment of SBCI’s equity operations in Japan followed by postings to Hong Kong, Singapore and Zurich covering the Asian equity markets.

© 2014 Copyright  Anthony Garner - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in