Sunday, April 21, 2019

Doing More Trading Research

Seems like April is the time for me to think about trading. I developed a very simple mechanistic trend-following model for trading Bitcoin futures. I have placed orders in the market but they haven't triggered yet. Initially, I tried to be too clever, but quickly decided that just using mechanical rules will work better...

Now I am returning to thinking about more sophisticated models as well. Here are the results from a very simple mean reversion model – it goes short when stocks are strong and vice versa, with daily trades on the NASDAQ index:

This assumes perfect trades with no fees. It worked great until the end of 2008. Then it did nothing for three years and then started working again. But in the last five years it again went nowhere. Strangely, it looks a lot like the returns from trend-following over this period. Still, from 2005 to the present it returned 19% per year. I might be wrong, but I'm thinking that this is a benchmark for more sophisticated forecasts. If we can predict that we should trend follow rather than mean revert for a few of the worst days here, returns would improve a lot. But it has to be a very simple method that won't result in overfitting.

On the other hand, the NASDAQ 100 index itself returned 14.18% and go long with a stop if the market falls 1% or more intraday returned 19.85% a year.

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