Category: Relative Strength
Feb 16, 2024
in Backtest, Relative Strength
The ETF Relative Strength backtest, which is free to use, is now a simplified version of the Relative Strength Composite backtest.
This means that, rather than relying on a single lookback period for relative strength, you can diversify across a range of RS lengths and thereby protect against parameter choice misfortune.
i.e. though a particular lookback may have historically outperformed other lookback lengths, there's always the possibility that it may underperform in the future.
The RS composite model reduces that risk by stepping through the lookback periods, from your chosen minimum to maximum, and invests in the top (strongest) of the 3 securities from each of those.
In the example below the minimum RS length is 3-months, the maximum is 12-months and the step value is 1. This means that, each month, the backtest will invest 10% in each of the:
- Top ETF from QQQ, MDY and SPY ranked by 3-month total return
- Top ETF from QQQ, MDY and SPY ranked by 4-month total return
- …5-month total return
- …6-month total return
- …7-month total return
- …8-month total return
- …9-month total return
- …10-month total return
- …11-month total return
- Top ranked ETF from QQQ, MDY and SPY ranked by 12-month total return
click image to view full size version
If QQQ ranks top for all 10 of those specified RS lookback periods, then 100% will be invested in QQQ. If SPY ranks top for 11 and 12-month returns and QQQ for the others, then 80% will be invested in QQQ and 20% in SPY. etc etc.
The step value can be increased to determine whether it is possible to obtain sufficient diversification without needing to employ every RS length. For instance, raising the step value to 3 in the above example will mean the backtest ranks QQQ, MDY and SPY by 3, 6, 9 and 12-month returns each month and invests 25% in the top ranked security from each of those.
To backtest just 6 and 12-month RS lengths, set RS Length Min to 6-months, Max to 12-months and Step to 6. The backtest will then, each month, rank QQQ, MDY and SPY by 6 and 12-month returns and invests 50% in the top ranked security from each.
Go to the ETF Relative Strength backtest
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Note:
- All returns on ETFreplay are Total Return, which accounts for price appreciation and the receipt and reinvestment of dividends (and any other distributions, such as capital gains distributions). See Total Return vs Price Return
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Subscribers, when logged in, have the option to switch from backtesting relative strength to mean-reversion and are not restricted to the 11 symbols provided for ETF 1, 2 and 3. Annual subscribers (regular or pro) also obviously have access to the full fat RS Composite backtest.
Feb 08, 2023
in Relative Strength, Video, Parameter Summary
Instructional video on how to use Composite Relative Strength to improve your ETF backtesting process. #STUDY
to expand video on screen, click the '4 expanding arrows' icon in the bottom right corner of the video screen. Use the settings icon to change to 1080 quality if it seems at all blurry
See also: RS Parameter Performance Summary
Jan 30, 2023
in Relative Strength
We have added a new backtest, Relative Strength Composite, which can protect against parameter choice misfortune by making it easy to diversify across a range of lookback values.
When relying solely on a single lookback period, though it may have backtested well, there's always the possibility that it may underperform in the future. The RS Composite backtest attenuates that risk by stepping through the return lookback periods, from your chosen minimum to maximum, and invests in the top (or bottom) x securities from each.
In the following example, the minimum length is 3-months, the maximum lookback is 12-months and the step value is 1. This means that, each month, the backtest will invest 10% in each of:
- Top security ranked by 3-month returns
- Top security ranked by 4-month returns
- …5-month returns
- …6-month returns
- …7-month returns
- …8-month returns
- …9-month returns
- …10-month returns
- …11-month returns
- Top security ranked by 12-month returns
click image to view full size version
The step value can be increased to assess whether it is possible to retain a significant degree of diversification without needing to employ every return length. For instance, raising the step value to 3 in the above example will mean that the backtest ranks the portfolio ETFs by 3, 6, 9 and 12-month returns each month and invests 25% in the top ranked security from each of those.
Watch video: How to use Composite Relative Strength
The Relative Strength Composite backtest is available to annual subscribers, both regular and pro.
Note:
- Just as a diversified portfolio means that some part of it will always be a drag, a composite of model variants will always underperform the single best version of a strategy....but it also avoids being exclusively in the worst.
- To see how each of the return lengths performed individually, rather than as a composite, use the RS Parameter Performance Summary
Apr 05, 2022
in Backtest, Relative Strength
We have added a Hold Filter option to the Portfolio Relative Strength and RS - Combine Portfolios backtests.
When the Hold Filter is turned on, the ETFs will be held as long as they remain ranked in the top (or bottom) Y.
i.e. If you choose a Buy Top of 2 and a Hold rank of 4, then the backtest will invest in 2 ETFs, but will only rotate out of an ETF when it drops below the top 4.
Using the Hold Filter makes a model less reactive and as a consequence it reduces trade activity. By not switching each and every time a security moves in and out of the top X, it can also result in fewer whipsaws. However, the higher the hold rank number is, the less responsive to changes the model will be, so a balance must be struck.
click image to view full size version
Note: the hold rank must be greater than the buy top / bottom number and be less than the number of securities in the chosen portfolio(s).
Dec 09, 2021
in Relative Strength, Mean Reversion, Regime Change
This example employs a simple credit spread style ratio to define the prevailing risk on / off regime and uses that to switch between different strategies.
When the High Yield / Treasury ratio is trending upwards (i.e. short MA above long MA) the backtest pursues a mean-reversion strategy, investing in the weakest short-term performers (buying wholesale) in a list of broad U.S. equity ETFs.
Conversely, when the HYG / IEI ratio trends down (short MA below long MA), the backtest switches to a Relative Strength strategy; buying the top five from a list of mixed asset class ETFs. Selecting the strongest five securities from the list provides some diversification while also giving the backtest the opportunity, in bear markets, to allocate 80% to fixed income and, in the most severe periods, to avoid equities entirely.
Specific parameters and ETFs are not the focus of this example, rather, it is intended to highlight the backtest functioanlity and to provide a starting point for subscribers to further research and develop.