4 ms·
Average return is just one statistic. You can earn an arbitrarily high daily average return by taking an ordinary strategy (e.g. buy and hold the S&P 500) and
by Majromax 5y ago
Average return is just one statistic. You can earn an arbitrarily high daily average return by taking an ordinary strategy (e.g. buy and hold the S&P 500) and applying large amounts of leverage. Returns will be great until the strategy blows up.
What was the volatility of this strategy? When backtested on the historical data, what was the maximum drawdown? What happens when trading costs or slippage (buying at the ask, selling at the bid) are modeled additionally?
252 trading days times two trades per day (short sell at open, buy to close at close) is a lot of trades, and execution quality will be very important.
Does this strategy hold up with week-long holding times?
- jliptzin 5y agoHe is trading Vanguard Sector ETFs, I doubt there is any issues with execution quality or getting blown up by a rise in volatility.
- X6S1x6Okd1st 5y agoAt sufficiently high leverage any volatility is high enough to bring on a total loss
- Majromax 5y agoAny issue with execution quality would really hurt profitability, however. The yearly average rate of return is noted as about 25%. If there's a 0.1% slippage on the buy and sell sides, over a year's worth of trades that profit is gone. And I'm not worried about "getting blown up" by a rise in volatility (although since this is fundamentally a short position it would be blown up by a theoretical 100% rise in a sector ETF), but I'm more interested in the risk-adjusted return or Sharpe ratio. Since individual sectors are less diverse than the market as a whole, and since this strategy invests (shorts) one sector at a time, I would expect it to see greater day-to-day variability even before the reversion to mean comes into play. I'm curious about how much greater.