*Sep 14, 2016*
in Relative Strength

**Why does your Relative Strength ranking of ETFs, work better than ranking them using the Sharpe Ratio?**

The ETFreplay Relative Strength ranking methodology has the Sharpe Ratio concept at its core but it also reflects some more modern financial modelling methodologies.

So the Sharpe Ratio has volatility in the denominator. The thing about this is that the Sharpe Ratio effectively * overrates* very low volatility ETFs. In reality, investors value returns more than they do

Another thing we did was enable the user to use 2 timeframes for return. The reason is that it is well-accepted that a model can have up to 3 factors as the factors can help each other out. More than 3 factors starts to run into data-mining, which is something we need to be careful of.

Sometimes 1 factor which backtests well over longer time periods can have a rough patch. Another factor can help mitigate the problems and by using 2 return periods, we are not overly reliant on a single return factor.

Hope that helps and let us know if you have any other questions or comments.

See also our FAQ's for common questions

- Backtest (15)
- Channel (3)
- Correlation (3)
- Dashboards (1)
- Drawdown (6)
- Mean Reversion (8)
- Moving Average (4)
- Mutual Funds (2)
- Ratio (8)
- Regime Change (12)
- Relative Strength (24)
- Screener (5)
- Sequential RS (7)
- Stop Loss (2)
- Total Return (2)
- TRD Total Return Diff (4)
- Trend Quadrants (1)
- Video (22)
- Volatility (8)