Aug 23, 2022
in Regime Change, Ratio
A question that we receive with some regularity is "can I run a backtest that changes strategy based on whether SPY is above or below its 200-day Moving Average?"
The answer is yes. We have a group of backtests that switch between strategies depending on the prevailing regime. These regime backtests build up on the logic of the Ratio MA backtest and come in 2 varieties:
With these two backtests, when the ratio is above its MA the backtest runs the Regime 1 portfolio / RS strategy (i.e. Risk On). Conversely, when the ratio is below its MA, the Regime 2 (Risk Off) portfolio is chosen.
If, rather than using a ratio, you want to switch strategy based on whether or not SPY alone is above / below its 200-day MA, then you can use XZERO as the Regime 2 security.
XZERO is simply a zero return index (i.e. it's a constant), so an MA of the ratio SPY / XZERO is the same as a moving average of SPY itself (see the Parameter Summary comparison at the bottom of this post).
Regime RS backtest that uses the SPY 200-day MA to determine the regime
Note: Moving Averages on ETFreplay are calculated using Total Return. i.e. the calculation does not just use closing prices but also accounts for the receipt and reinvestment of any dividends and distributions. The MA is then compared to the Total Return value of the ETF, so that it's like-vs-like; everything is Total Return, not just price.
See:
SPY MA Parameter Performance Summary on the left. SPY / XZERO Ratio MA Parameter Summary on the right. The backtest returns are the same.
Jul 05, 2022
in Backtest, Dashboards, Tracking Error
We have added some new functionality to the Core-Satellite backtest, Tracking Error tool and Dashboard.
Core-Satellite
The Core-Satellite backtest has an updated look and the Hold Filter, which we recently added to the Portfolio RS and RS - Combine Portfolios, can now be applied to either (or both) of the satellites.
click image to view full size version
The appearance of the other parallel relative strength backtests, the sequential RS and various regime backtests has been similarly updated.
Tracking Error tool
The tracking error values now link through to the ETF charts page, which will automatically load the two securities over the specified duration and display their performance.
click image to view full size version
Dashboard
We recently added a new Summary window option that displays the 1-Day, Year-To-Date, 2021 and 2020 Total Return of each security in your chosen list.
click image to view full size version
Apr 10, 2022
in TRD Total Return Diff, Video, Tracking Error
Instructional video on how to use Tracking Error to improve consistency in ETF backtesting. #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
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).
Feb 28, 2022
in Tracking Error
We have added a new tool that enables subscribers to see how closely the ETFs, stocks or mutual funds in their various lists track a given benchmark security.
Tracking error is the annualized standard deviation of the daily return difference between the security and the benchmark. i.e.
TE = StDev(daily total return - benchmark daily total return) x SQRT(252)
1% Tracking Error therefore means that, if returns are normally distributed, the security’s return will be within +/- 1% of the benchmark return 68% of the time and within +/- 2% of the benchmark 95% of the time.
Realized daily returns are obviously not perfectly normally distributed, so those probabilities are not to be taken literally, they are simply a rough guide. Nonetheless, tracking error provides an alternative perspective on risk from volatility and maximum drawdown.
A stock or ETF that has a persistently high tracking error will deviate substantially from the benchmark and is therefore unpredictable. This does not mean the security must automatically be excluded from the portfolio, but it would be prudent to set its position size accordingly.
Side note: The tracking error of a 2x leveraged ETF will be approximately the same as the volatility of its benchmark. i.e.
StDev (2x Daily Return - Daily Return) x SQRT(252) = StDev (Daily Return) x SQRT(252) = Volatility
SSO tracking error vs SPY ~= SPY volatility
QLD tracking error vs QQQ ~= QQQ volatility
etc.
click image to view full size version
Go to the Tracking Error tool