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Monday, September 24, 2007

Weekend Trader Surprise

As you might have noticed there haven't been that many posts during the last month. Part of the reason is that really not a lot happened to the systems in my portfolio. When I recalculated the weights two weeks ago, they were nearly identical to those I calculated in August. The portfolio P/L was oscillating a bit between -10% and -5%, and that was about it. However, last week I was pleasantly surprised by Weekend Trader soaring 25% to an all-time high.



The event confirms that sticking to a system is important. My experience so far is that profits usually come when you expect them the least.

Even though the system has a history of nearly two years on Collective2, the events of last week had a substantial impact on the statistics. For example, the graph below shows the Sharpe ratio and its BCa-bootstrapped (10,000 replications) 95%-confidence interval on each day, calculated using the data available up to the day of calculation (e.g. the left-most point of the curves is based on the first 100 trading days, the right-most point is based on the entire history of 486 trading days). The last five trading days caused the Sharpe ratio to jump from 0.82 to 1.31, which demonstrates how unstable these statistics can be--even with two years of data.



What we can learn from this is that there really is no point in preferring a system with a Sharpe ratio of 1.2 over one with a Sharpe ratio of 1, if they jump around all the time and have large overlapping confidence intervals. Most likely these differences are too small to be both statistically and practically meaningful. Instead of trying to pick the "best" system, we might be better off trading a larger number of "reasonably good" systems simultaneously.

1 comment:

Anonymous said...

How very true! Its amazing that when you expect it the least, it suprises you (that is if it a system that does not take undue risks or gets overleveraged).
Also the trading of many systems at one time is great way to diversify risk/reward.
Thanks Science trader for taking the time to do this blog.