Tuesday, October 30, 2007

Optimally Using Multiple Indicators

I've tried estimating a single model for both the NDX and SPX. The rationale was that taking itno account the correlation between the indices would use more information and, therefore, provider better signals for trading both indices. The results though were disappointing. Almost all indicators were almost exactly the same as those generated by my current individual NDX and SPX models. One exception - my furthest forward forecast for the SPX was severely degraded. Of course, this model fits the data better than my individual models. But it generates equal or poorer indicators. This is the usual situation in technical analysis. A simple moving average is not a good statistical model. But might be useful as a technical indicator.

But I am finding that using the raw predictions of the SPX and NDX models together is already leading to better decisions (BTW the model is long with Thursday being the likely start of the next decline). The next research exercise is working out how to use the two model signals together in an optimal way. For example, is it best to only take trades when both models indicate the same direction? It is easy to backtest this in an Excel spreadsheet (All my backtesting is done in Excel - I don't use anything more fancy - specific trading software wouldn't be able to run my model anyway).

P.S. I ran the tests - only taking a trade when both models (SPX and NDX) give the same signal actually makes NDX trading performance worse. Something more subtle is needed...

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