Quant Mashup System Parameter Permutation - a better alternative? [Better System Trader]When I wrote my Wagner Award winning paper "Know your System! – Turning Data Mining from Bias to Benefit," I had two goals in mind: Introduce a new method to reasonably estimate the long-run expected performance of a trading system, and Provide a simple method for the average system(...) Strategy Evaluation with Dave Walton [Better System Trader]Today we're covering a topic which can really be a concern for traders of all levels, from beginner to pro, and that is the topic of strategy evaluation. Have you ever found that real-life performance does not match expected results? Or perhaps you have a strategy that is stuck in a drawdown(...) PDF: To Win With Smart Beta Ask If the Price Is Right [Research Affiliates]This is the second of a series on the future of smart beta. In our first article in this series—“How Can ‘Smart Beta’ Go Horribly Wrong?” 1—we show, using U.S. data, that the relative valuation of a strategy (in comparison with its own historical norms) is correlated with the(...) Mini-Meucci : Applying The Checklist - Steps 3-5 [Return and Risk]"In the future, instead of striving to be right at a high cost, it will be more appropriate to be flexible and plural at a lower cost. If you cannot accurately predict the future then you must flexibly be prepared to deal with various possible futures." Edward de Bono, author and thinker(...) State of Trend Following in May [Au Tra Sy]A strong down month in May for the state of trend following index, which solidifies the downtrend from the last two months and takes the YTD performance in the red, after the strong start to the year. Please check below for more details. Detailed Results The figures for the month are: May return:(...) Simple Machine Learning Model to Trade SPY (h/t AlgoTrading Reddit) [Alpha Plot]I have created a quantitative trading strategy that incorporates a simple machine learning model to trade the SPY as part of my ongoing research in quantitative trading. The focus here was not on creating a strategy with alpha but rather to develop a framework both in my mind and in code to develop(...) Markov Switching Regimes say… bear or bullish? [Quant Dare]We continue with our last OBSSESION… trying to capture an index trend but at the moment, not playing with future information. Markov Switching RegimesWe are going to introduce the Markov Switching Regimes (MSR) model which, as its name indicates, tries to capture when a regimen has changed to(...) Trend Following carries on with downtrend in May [Wisdom Trading]May 2016 Trend Following: DOWN -7.37% / YTD: -1.71% This time, the negative performance for the index last month takes the Year-To-Date performance in the red, for the first time in 2016. Below is the full State of Trend Following report as of last month. Performance is hypothetical. Chart for May:(...) Your best strategy in 2016… so far [Quant Investing]I am sure you also don't run after the most recent best performing investment strategy. I stopped doing this, a long time ago, after I (quite a few times) discovered I was the last to jump on the strategy just as it stopped working. But I suspect you also find it interesting to see what has(...) Capital correction (pysystemtrade) [Investment Idiocy]This post is about how should you adjust the trading capital you have at risk given the profitability (or not) of your trading account. I'm posting this for three reasons. Firstly it's a pretty important topic. I address, in some detail, how to set your risk target for a given amount of(...) Random Asset Allocation in the ASX200 [Ryan Kennedy]To paraphrase the old adage; "a monkey throwing darts will outperform most fund managers". I have seen this concept explored several times in relation to the SP500, but I was interested to see if it had any relevance to the ASX200. Our monkey with darts will be a random number generator,(...) Trend Model via Difference Between Long and Short-Term Variance [Quantpedia]We relate the performance of trend following strategy to the difference between a long-term and a short-term variance. We show that this result is rather general, and holds for various definitions of the trend. We use this result to explain the positive convexity property of CTA performance and show(...) Will Bonds Deliver Crisis Alpha in the Next Crisis? [Alpha Architect]Bonds are often viewed as being great diversifiers due to the perception that they perform well during tough times for stocks. Historically this has been a true statement. But will it continue? Our answer: unclear. Most investors use correlation to measure the diversification benefit an investment(...) Tactical Trend-Following: Core or Alternative? [Flirting with Models]Answering whether a strategy should be a core holding or an alternative holding often has less to do with the investment strategy itself and more to do with an investor’s understanding of how that strategy will perform. Asset classes and strategies that investors are comfortable with, and have a(...) Summer, Winter and the Volatility Premium [Factor Wave]A member of our slack channel recently asked if there was an equivalent of "sell in May" for volatility trading. Does the volatility premium, the difference between implied volatility and the subsequent realized volatility, differ during summer and winter months? To test this idea for the(...) Need for Speed: High Frequency Economic News Trading [Justinas Brazys]Markets are efficient if new information is incorporate instantly and essentially without any trading, i.e. price jumps to the correct level that represents all available information at the time. If you believe markets are indeed perfectly efficient, there seems to be no point in using news as a(...) Mini-Meucci : Applying The Checklist - Step 2 [Return and Risk]"Guessing before proving! Need I remind you that it is so that all important discoveries have been made?” Henri Poincaré, French mathematician (1854-1912) In this second leg of The Checklist tour, Estimation, we are going to make some educated guesses about the true unknown distribution of(...) Computation of the Loss Distribution not only for Operational Risk Managers [Quant at Risk]In the Operational Risk Management, given a number/type of risks or/and business line combinations, the quest is all about providing the risk management board with an estimation of the losses the bank (or any other financial institution, hedge-fund, etc.) can suffer from. If you think for a second,(...) The Internal Bar Strength Indicator [Jonathan Kinlay]Internal Bar Strength (IBS) is an idea that has been around for some time. IBS is based on the position of the day’s close in relation to the day’s range: it takes a value of 0 if the closing price is the lowest price of the day, and 1 if the closing price is the highest price of the day. More(...) Bubble Investing: Learning from History [Alpha Architect]We just wrote a piece for Forbes on financial bubbles in the lab. Punchline: investors initially underreact to fundamentals, then they overreact, and eventually prices correct. But how common are crashes? Ben has some interesting thoughts, but the results are limited to the US market. Now, one of my(...) Factor Attribution of Jim Cramer's Mad Money Charitable Trust [Quantpedia]This study analyzes the complete historical performance of Jim Cramer’s Action Alerts PLUS portfolio from 2001 to 2016 which includes many of the stock recommendations made on Cramer’s TV show “Mad Money”. Both since inception of the portfolio and since the start of “Mad Money” in 2005(...) Relative Strength Index (RSI) Model [Oxford Capital]I. Trading Strategy Developer: Larry Connors (The 2-Period RSI Trading Strategy), Welles Wilder (The RSI Momentum Oscillator). Source: (i) Connors, L., Alvarez, C. (2009). Short Term Trading Strategies That Work. Jersey City, NJ: Trading Markets; (ii) Wilder, J. W. (1978). New Concepts in Technical(...) Webinar: Feature Selection with Machine Learning [Quant Insti]Feature Selection is the automatic selection of attributes in your data (such as columns in tabular data) that are most relevant to the predictive modeling problem you are working on. Feature selection methods aid you in your mission to create an accurate predictive model. They help you by choosing(...) Cointegrated Time Series Analysis for Mean Reversion Trading with R [Quant Start]A while back we considered a trading model based on the application of the ARIMA and GARCH time series models to daily S&P500 data. We mentioned in that article as well as other previous time series analysis articles that we would eventually be considering mean reverting trading strategies and(...) A Factor Investor’s Perspective of the Economic Cycle [Factor Investor]Debates abound on the relative importance of the economic cycle to investment success. Peter Lynch famously said, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.” On the flip side, macro investment houses have constructed intricate(...) Want to spot a true Value Investor? Look for horrible recent performance [Alpha Architect]Harry Houdini is perhaps the best-known magician of all time, gaining notoriety in the early 20th century through his daring escape acts. Houdini escaped from straight jackets while suspended from chains, fought his way out of submerged mailbags, and performed a “buried alive” stunt. Crowds(...) mini-Meucci : Applying The Checklist - Step 1 [Return and Risk]Introduction In this mini-Meucci series of posts we'll put the 10 steps of The Checklist into practice by constructing a low volatility portfolio in Python. This toy/basic example will be a short tourist trip, highlighting key attractions that you can then explore further... Of course, these(...) A Few Little Links [Factor Wave]I'm currently working on three things: a VIX option trading strategy, a piece about how factors relate to earnings announcements and a Kelly criterion type thing for options. But none is particularly close to being done. So I thought i would post a few links to articles that I found(...) Diversification Will Always Disappoint [Flirting with Models]Summary For its ability to reduce risk without necessarily sacrificing potential reward, diversification is known as the only free lunch on Wall Street. Diversification provides investors with the important ability to invest in the face of uncertainty. When viewed for its pieces instead of as a(...) A Long Term Look At Memorial Week Seasonality [Quantifiable Edges]The week of Memorial Day has shown some interesting seasonal tendencies over the years. And for a long time it exhibited consistent bullishness. But it has faltered greatly the last several years. The chart below examines SPX performance from the Friday before Memorial Day to the Friday after it.(...) Build Technical Indicators in Python [Quant Insti]Technical Indicator is essentially a mathematical representation based on data sets such as price (high, low, open, close, etc.) or volume of a security to forecast price trends. There are several kinds of technical indicators that are used to analyse and detect the direction of movement of the(...) Best Links of the Last Two Weeks [Quantocracy]The best quant mashup links for the two weeks ending Saturday, 05/28 as voted by our readers: A simple breakout trading rule (pysystemtrade) [Investment Idiocy] Some Impressions from R Finance 2016 [Revolutions] Most popular machine learning R packages [Eran Raviv] Exploring Extreme Asset Returns(...) Podcast: Tribute to Nelson Freeburg [Better System Trader]Nelson Freeburg was the editor of Formula Research, a newsletter that developed systematic timing models for the stock, bond, and commodity markets. He was also a research consultant working with institutional money managers to design proprietary timing models. Nelson had been an active trader since(...) Reminiscences of R in Finance 2016 [Portfolio Probe]When I announced R in Finance 2016 I talked about 2 days of conference and 50 speakers. I missed out the 3 days of sleep deprivation. But a pleasant 3 days of sleep deprivation it was — seeing old friends and making new ones. I’m not sure that Mother Mary believed me that in our house we still(...) PDF from Artur Sepp: Gaining the Alpha Advantage in Vol Trading (h/t Quant News)1. Present some empirical evidence for short volatility strategies and the cyclical pattern of their P&L: alpha in good times, beta in bad times 2. Introduce a factor model with risk-aversion to explain the risk-premium of short volatility strategies as a compensation to bear losses in bad(...) Why Algo Traders Prefer Python [Quant Insti] Exploring Extreme Asset Returns [Quant Dare]Tail or extreme assets returns have been extensively studied. In his amazing paper: “Empirical properties of assets returns: stylized facts and statistical issues”, Rama Cont provides a framework on statistical analysis of price variations in various types of financial markets. He presents(...) Some Impressions from R Finance 2016 [Revolutions]R / Finance 2016 lived up to expectations and provided the quality networking and learning experience that longtime participants have come to value. Eight years is a long time for a conference to keep its sparkle and pizzazz. But, the conference organizers and the UIC have managed to create a vibe(...) Updated Dual Momentum Test [Scott's Investments]I frequently get asked for updated tests on various strategies. Using Portfolio123 I ran a backtest on a Dual Momentum strategy from 1/1/2007 – 5/25/2016. The strategy is updated on Scott’s Investments monthly, the most recent update is here. The strategy invests equally in one ETF from each of(...) ConnorsRSI Analysis [Alvarez Quant Trading]A couple posts ago, I did the RSI Analysis. This post will focus on ConnorsRSI which I created while working for Larry Connors. When creating the indicator, the focus was on short-term mean-reversion results. We will look at that here but also how does it handle longer-term holds. Since I did not(...) Forecasting the VIX to Improve VIX-Derivatives Trading [Quantpedia]Konstantinidi et. al. state in their broad survey of Volatility-Index forecasting: "The question whether the dynamics of implied volatility indices can be predicted has received little attention". The overall result of this and the quoted papers is: The VIX is too a very limited extend (R2(...) A Candid Discussion with an Algorithmic Trader [Quant Insti]The role of Algorithm in a person’s life is too substantial to be ignored. From a simple coffee-making machine to the music system in his car, from elevators to search engine like Google, all are governed by a set of logical instructions – Algorithms or Algos, which enable them to respond to a(...) Seasonal Effects in Equity Markets [Jonathan Kinlay]There are a plethora of seasonal anomalies documented in academic research. For equities these include the Halloween effect (“Sell in May”), January effect, turn-of-the-month effect, weekend effect and holiday effect. For example, Bouman and Jacobsen (2002) and Jacobsen and Visaltanachoti (2009)(...) The Paradox of Active Management [Philosophical Economics]In this piece, I’m going to introduce a simple market model, and then use the model to illustrate certain important concepts in the debate between active and passive management. Some of these concepts have already been discussed in prior pieces, others are going to be new to this piece. Consider,(...) Day of month effect on Bond Equity portfolio [Sanz Prophet]In this post we will: Take a look at a simple, momentum based, monthly rebalanced Equity/Bond portfolio. Search for what has been the optimal dates in the month to rebalance such a portfolio. Each month we allocate to two ETFs: SPY and TLT. If SPY has outperformed TLT we rebalance to 60% SPY – 40%(...) Automatic Support/Resistance using ML [Largecap Trader]I think an interesting application of ML could be generating the ‘features’ for inclusion in a trading algorithm, converting non-numerical data into numerical. For example, converting market sentiment or satellite imagery to count cars in a retailer’s parking lot. More examples here. I had(...) A simple breakout trading rule (pysystemtrade) [Investment Idiocy]Breakout. Not the classic home arcade game, seen here in Atari 2600 version, but what happens when a market price breaks out of a trading range. The Atari 2600 version was built by Wozniak with help from Jobs exactly 40 years ago. Yes that Wozniak and Jobs. Source: wikipedia In this post I'll(...) Behavioral Finance Strikes Again: Contrast Effects in Markets [Alpha Architect]At this point, even hard core efficient market fans will likely admit that behavior can influence investment decisions. Humans aren’t robots. However, just because some investors exhibit bad behavior that doesn’t mean they can influence prices. As the story goes, smart investors are prepared to(...) New Whitepaper: Why Tactical FIxed Income is Different [Flirting with Models]We recently updated, expanded, and put a new face on a whitepaper we had written last year called, “Why Tactical Fixed Income is Different.” You can access the new paper here. In the original version, we looked at some of the reasons why a simple tactical strategy that commonly works in equities(...) A Stunning New Finding: Return Seasonalities are Everywhere [Alpha Architect]We’ve discussed return seasonalities in the past, especially as they pertain to our approach to momentum. Turns out seasonality effects aren’t confined to momentum — they are literally everywhere and they are incredibly strong. This paper will blow your mind once you let the results settle in(...)