Skate, I'm fascinated that you've combined 3 types of go-Long signals into your Hybrid strategy. Did you ever consider running all 3 with separate accounts somehow? Wouldn't backtesting and tracking performance forward be easier in that case?
Newt, that a great question. (I'll post up some charts & reports to explain it in pictures)
# Apologies for the long winded explanation
Points to answer
1. "I'm fascinated that you've combined 3 types of go-Long signals into your Hybrid strategy"
It was the captains idea after explaining the problem of high correlation to him as it was becoming an issue for me.
2. "Did you ever consider running all 3 with separate accounts somehow?"
Yes, I traded the three strategies separately over a period of time & this is how I found the problem of correlation.
3. "Wouldn't backtesting and tracking performance forward be easier in that case?"
No, it's no easier or harder backtesting & tracking performance of an individual strategy or backtesting a combined strategy. I code up the idea given to me by the captain & backtested it. Backtesting a strategy with one buy condition & one sell condition is no different to backtesting a strategy with three buy conditions & two sell conditions. (there is no difference)
Optimisation is a different matter
Backtesting as I have explained, 'there is no difference' but when it comes to optimisation there is a huge difference. Each strategy need to go through its own optimisation procedure, combined & re-optimised to sharpen the overall strategy. One set of parameters work individually whereas another set of parameter are required when they have to work together after being combined.
Trading $150k positions
@captain black floated the idea of combining the strategies after explaining to him that the strategies I was actually trading were taking the same signals on the same week & sometimes only a week apart. At that stage I was buying $50k positions, meaning I could have $150k in one position which was crazy.
I emailed the captain
I fired off an email to the captain for clarification & guidance (I'm sure he won't mind me disclosing our personal email correspondence, I can't ask permission as he's out of range for two weeks & I don't want to wait that long to answer)
What did I do after receiving the captains advice ?
I quickly coded up my best three strategies into one system & called it the HYBRID strategy. I went to work backtesting the guts out of the new combined (HYBRID) strategy. I started off fresh with a new system strategy development in place & the rest is history.
When the captain speaks, I listen.
Skate.
EMAIL BELOW (from the captain)
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The captains email response
The only real issue with trend following is that most systems are correlated and tend to track the broader market movements. If you're happy to accept that then there's nothing wrong with trading multiple correlated systems.
You won’t have a smooth equity curve and if you're invested in the same companies across multiple systems you run higher risks if that company goes broke or has a big price drop.
One way to reduce that risk is to run monte carlo simulations to get an idea of the statistical variation of the system if you take trades in a random way rather than using positionscore. That way, if the monte carlo runs have a tight range you can ignore a signal in one system is you're already holding that company/share in another system.
Your systems will still move up and down in a similar fashion over the long term but you reduce the risk of a catastrophic event if a company you're holding across all systems goes broke.
If you decide to trade multiple correlated systems and you want to reduce the risk of a catastrophic event such as a company going broke then you may want to look at ignoring a signal in one system and taking the next signal if you already own that company in another system.
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More to follow..