Sunday, April 15, 2018

The Gold Model

I have now managed to reconstruct something similar to the old model I tried to trade a decade ago. It is a mixture of trend following when the markets are trending and predicting the direction to trade in when markets are more choppy. It follows a clear set of rules with no real discretion. Using those rules since January 1st this year would have returned 51% with a Sharpe ratio of 0.58. The model wins 71% of the time with an average daily win of 1.15%. The maximum loss is 1% as set by the stop. When I optimize a portfolio of the various methods I have come up with to maximize the Sharpe ratio of the portfolio the solution says to put 90% in this strategy and to actually short one of the other strategies! At the moment the model is long, which is good, as I have a long calls position still on from Friday. I think I will rename the new version of the old model the "gold model" :)

By the way, if you can borrow, maximizing the Sharpe ratio makes much more sense than maximizing return. You then get the smoothest time path of returns, which you can lever up if you want taking into account the size of likely drawdowns.

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