Core-Satellite Demonstration. Combining 2 ETF strategies Into a Single Unified Module

Sep 04, 2018 in Backtest | Video

In this video we demonstrate how to build 2 individual strategies and then easily combine them using the Core-Satellite backtest module. The public video below uses the following subscriber-only backtest ETFreplay Core - Satellite Backtest

 

 to expand video on screen, click the '4 expanding arrows' icon in the bottom right corner of the video screen

 

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Backtesting more than 25 securities at once on ETFreplay.com

Jun 16, 2018 in Backtest | Relative Strength | Video

A video showing how to backtest more than 25 securities at a time. The public video below uses the following subscriber-only backtest ETFreplay Relative Strength Backtest - Combine Portfolios

 

 to expand video on screen, click the '4 expanding arrows' icon in the bottom right corner of the video screen

 

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ETF Backtest Concepts - Relative Strength And The Use of a Moving Average Filter

Apr 30, 2018 in Advanced Relative Strength | Backtest | moving average | Video

A video using ETFreplay Backtesting to look at some relative strength concepts and a moving average filter (daily).

 

 to expand video on screen, click the '4 expanding arrows' icon in the bottom right corner of the video screen

 

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2000 to 2003 focus QQQ's large drawdown backtest

Jan 07, 2018 in Backtest | moving average

Study many different sub-periods for many different markets.  It helps you understand scenarios, it helps you understand strengths and weaknesses of various techniques in backtesting.

Learn how to put the odds in your favor.   If you study many different time periods across many types of markets, you will gain understanding of a strategy that is fragile vs a strategy that is more durable.   You will have ideas that cannot be supported and you realize their weaknesses.   Running bad backtests and learning from that is part of the process.

Below is one look at the 2000-2003 bear market.  We suggest you look at that time period and many other time periods using many different types of funds.   QQQ's downturn was especially bad due to the extended run-up in the prior years (QQQ index existed in prior years but the ETF product QQQ of course did not exist prior to the middle of 1999). 

 

 

 **A pro subscription allows you to backtest to 12/31/99 using daily total return data. 

 

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Short-Sell Backtesting with ETFs

Nov 02, 2017 in Backtest | Short Selling | VIX | Volatility

 If you would like to test Short-Selling on ETFreplay, use the versatile app called Rel Str - Combine Portfolios.

You can test going short the top or bottom ranking securities in a list.

 

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Adding Rotation Options For Backtesting ETFs

Jun 29, 2017 in Backtest

We have added a new backtest rotation option, which we think delivers some useful flexibility.

Previously Relative Strength strategies could be rotated quarterly, monthly or semi-monthly.   Now you can choose a different schedule in the 'Relative Strength - Combine Portfolios' backtest module utilizing a useful feature we call Skip Rotation:

 

 

This way you can set for example a 3-month (quarterly) or a semi-annual rotation but not necessarily on CALENDAR quarter ends.  So for example, you could offset a quarterly rotation by 1 month and choose Jan, Apr, Jul, Oct.  Or you could choose 'every other month' such as in the example below:

 

Then below we reverse it so now it skips the opposite months as the above example and instead test an earlier 7-year period:

 

Separately, we can actually use this same structure to do some basic seasonality testing.   In the test below, we test going long Small & Midcap stocks for the period November to April and then invest simply in the benchmark S&P 500 from May to the end of October.  We do this by using checkmarks to move to the cash security (set to SPY) for May, June, July, Aug, Sep & Oct:

 

The green question mark icon next to 'Skip Rotation' will, when clicked, produce a pop-up help note with more information about the function. However,  if you have any further questions, please contact us

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ETF Regime Change Backtesting – update of a 2011 example

Dec 02, 2016 in Backtest | Regime Change

Back in 2011 we produced a little video that compared the performance of two very different 60-40 allocations: an aggressive portfolio invested in Emerging Markets, Financials and High Yield; and a defensive strategy based around Treasury Bonds, Utilities and Healthcare.

 

The purpose of that video, which can be seen here, was not to show which allocation was best but rather to illustrate that ‘that different sectors perform differently during the course of the business cycle’. It therefore makes sense that when there is a change in the overall regime, allocations should be materially adjusted. 

Below is an update to that original example. The same two aggressive and defensive allocations are used, but this time we have employed the Regime Portfolios Backtest to dynamically switch between them depending on the prevailing regime. For this example with have used a simple credit spread style ratio to define the regime. When high yield bonds are outperforming treasuries, the backtest invests in the aggressive allocation. When the opposite is true, it switches to the defensive portfolio.

This is not meant to be a comprehensive strategy by any means, it's just a simple example to illustrate the concept of adapting to change. Hopefully though it provides a solid starting point for subscribers to conduct their own regime based research.

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Trailing Stops vs Time Interval Stops. Yes ETFreplay has stops built into its architecture.

Sep 28, 2016 in Backtest

From subscriber on email:  "I would like to put a trailing stop on the backtest and/or investigate what would happen if I stopped and moved to cash."

This is one of the more common questions we get on email from members.

First off, built into the ETFreplay architecture IS a natural form of stop.  A stop is of course a point at which you exit -- either by moving to cash or moving to another security.   A good relative strength backtest will naturally move towards the performing ETF(s) and away from the non-performers.   We have different trade interval choices on ETFreplay and if you choose say monthly, then you have a stop built-in -- it is just a 'time-interval (monthly) stop.'   

Yes you are essentially locking in a full months performance and not exiting immediately and people often view this as risky -- but that is NOT what the evidence shows.  Having the perception of being 'less risky' instead just means you 'feel emotionally better because you are out of the market.'  Holding on until month-end and accepting that extra time-risk is often dramatically better than locking in a loss at a percentage.

Why?   Because first, stops usually get hit as market gets oversold and then it bounces back and you end up rotating at a dis-advantageous on the stop-price.   

But importantly there is a second reason, the market often not only bounces -- it recovers back strongly and sometimes back to a new swing high and you end up NOT rotating and are sitting on a paper non-taxable gain rather than having taking a real loss and now in cash and out of the market potentially missing more upside.

This second case has happened many times during the bull market that began a few years ago.  If you stopped out, did you get back in higher??  Many times that might be emotionally tough to do.   If you accept the calendar month return, you might occassionally be worse off -- but this is usually offset by the 'death by a thousand cuts' underperformance risk so many twitchy traders suffer from....

But what about stops as many people read about in all those trading books?  

Trading books are almost always based on things that have no ETF research or backtest support, many no backtest support at all.  Some recommend a 'percentage based stop'  (ie,  stop if XYZ drops by -8% from your purchase price).   Those that say they have research behind their method don't present the actual results and instead have done limited testing and made conclusions based on one set of detailed assumptions.   These are also almost always done on individual stocks -- not ETFs.   We are experts in ETF backtests and people should be aware that backtesting an ETF is NOT the same thing as backtesting an individual stock.   We have done a fair bit of work on individual stocks too -- but find that individual stocks are extremely noisy and it takes a tremendous amount of trading activity (many small positions to offset the added noise) to actually implement anything where the statistics can back it up.  Many invstment advisors simply can't do such things as trade hundreds and thousands of individual stocks every month or quarter.   (And as you can see in hedge fund results, neither can hedge funds that try to do it).

Also with individual stocks, you are always worried about a total cratering -- your stock potentially becoming a penny stock or bankrupt.   But even if you forget that ultimate risk, many stocks can lose tremendously more than a typical index ETF and simply not recover wheras an index of many stocks will recover.  Many past stocks that had large weightings in an index collapsed and the index not that soon after went back to new highs -- think Bank of America or Cisco Systems or worse Worldcom and countless others that were at one point considered core holdings.   With individual stocks, you cannot take hits like that that and never rotate away.  The losses can be huge and importantly, the opportunity cost of sitting in a dead stock long past its prime can cause you to dramatically underperform.  

Some of the hidden beauty of an index is that they by rules-based methodology let winning stocks and groups of winning stocks grow in weighting while broken stocks of past cycles lose their significance (weighting).  

While time-interval stops can work for individual stocks too, we are more concerned with how this all applies to ETFs since ETFs work much better for trading practicality reasons (after all, trading an ETF is exactly the same thing as trading a large basket of stocks all at once).   You get hundreds or even thousands of trades (and the associated altered exposure) for the cost of zero  (assuming you are in a free trading program like Schwab, Ameritrade or others have).

 

 

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Ratio Moving Average Backtest Example

Sep 02, 2016 in Backtest

There are lots of ways to skin a cat of course.   Here is a look at results of using a simple total return ratio between Emerging Markets (VWO) and an iShares Treasury ETF (IEF):

 

 

 

 

 

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New: Channel backtests

Jun 08, 2016 in Backtest

We recently added Total Return percentile channels to our range of backtesting tools.

The primary focus of ETFreplay has always been on relative strength analysis and we have tended to see moving averages as serving largely as an easy to understand introduction to backtesting in general.

Like basic MAs, channels are a trend following approach that use only an ETFs own past return history. i.e. they are not relative. 

However, unlike MAs, channels are defined by two measures (highs and lows) rather than just one, which intuitively makes sense as an uptrend is a series of higher lows and higher highs.  This also means that channels automatically adjust to volatility.

i.e. in a wide swinging trading range the channel boundaries will be far apart, whereas when the market winds down into tight range the channel will be narrow.

Standard channels are simply the highest and lowest values over the prior x days, weeks or months and the use of channel breakouts in trend following is long established. However, for investors such wide channels can mean:

  • Slow responsiveness. Trade frequency is extremely low because it takes a lot to enter a position and a very large change to trigger an exit.
  • Whipsaw losses, when they occur, are painfully large.

To ameliorate these problems, the backtests allow percentiles of the channel to be employed (the defaults being the 75th percentile for buys and 25th percentile for sells).  Doing so means that positions are entered / exited sooner, but the channel still remains wide enough to mitigate against frequent quick whipsaws.

See:
Single ETF channel backtest

Portfolio channel backtest (subscribers)

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