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Multiple
Sub Signals: - here is a real world trading approach that I have never seen
mentioned here. I would like to get some reaction. This is based on
some real world trading that is happening on another platform that I am helping
port over to AB.
The idea is to have signals for multiple
subsystems and then take your trading signal when a majority of the subsignals “line
up”.
For discussion purposes, visualize a mov
avg cross over AND
A volume oscillator AND
An advance decline curve AND
Perhaps a VIX type signal.
If you let each one be a buy or sell,
and call each S1, S2, S3, S4
then your buy statement could be
Buy = S1 AND S2 AND S3 AND S4.
This might be a little too stringent, so
perhaps you code it to give a buy if 3 of the 4 signals are a buy and you do
not care which ones.
In the work that I am doing with this
approach, I am seeing that each S(i) has a return and a dd over a long period
of time, but as you add combinations of the signals, the return increases a
little bit but the dd seems to drop and drop quite a bit. An example
might be returns for each one individually of say 8-10% CAR and 13-15% dd, but
when 3 out of 4 are combined as I describe above, the resulting return might be
9-12% CAR and 6-9% dd. These are not barn burners, and those
seeking or actually trading 50-100% CAR systems will laugh as they hit delete,
but for some folks who are risk adverse, or managing retirement portfolios, or
whatever, this kind of approach might have some appeal.
In the work I have done so far, there
has been NO OPTIMIZATION of the parameters within the subsystems. Any In
sample period compares favorably with OOS periods. The results look
steady over 12 years of data, with variations due to changing market conditions.
(I am not sure “IS and OOS” apply when no optimization has been
done, but what I mean is that breaking the total time period up into sections
shows no real degradation or “blowup” of one period relative to the
other.)
The details of the subsystems are not
the issue here—what I am raising is the question of the drawdown
dampening effect of the combination. Is this a mathematically correct
thing to expect? Does moving in this direction promise dd
reduction? Assuming you select subsystems that are not highly
correlated, should you not expect improvements in the combination that are not
possible in the single subsystems?
Any comments? Build-upons?
What?
Ken
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