Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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.


© 2005-2019 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

6 Critical Money Making Rules