Sectors to exclude

Stoxtrader · May 26, 2011

Quote from markd01:

Thank you, Stoxtrader.

Would you elaborate on why you excluded the above, especially with any metrics you have?

For example, in regards to #6 excluding low volatility stocks.. I just ran a baseline test on my system and a second run where I looked for stocks with 20 day ATR of less than 3%, my definition of low volatility. My low volatility set had exposure adjusted returns almost 3 times lower, slightly better Win%, 3 times lower Maximum Trade Drawdown, Profit factor some 37% higher, average trade p/l some 35% lower, and slightly higher Sharpe ratio. In other words, low volatility mean reverting stocks are safer, but also offer lower return.

RE #4 -- how sucessful are your mean reversion strategies trading commodities or commodity linked ETFs? I've developed my strategies focusing on equities.

RE #6 You specifically mentioned large cap though. I agree that higher volatility is "better" only because that's my personal preference.

Small/micro cap stocks might get excluded in my backtesting because I exclude when bid-ask spread is too high. Otherwise my systems don't discriminate based on market cap, whether high or low.

RE #4 As mentioned above in this thread, ETF's are a different animal, so it's usual to have an "only equities" and "only ETF's" stragegies. However I wouldn't recommend ignoring commodities completely. Your system might not trade them, but they do affect the market.

Metrics I don't keep track of, other than did the system perform as well in real time walking forward as predicted in backtesting. If not, back to the drawing board!

Stoxtrader · May 27, 2011

Quote from markd01:

I would feel more confident that something is not suited well for my strategy, if I had 100+ trades over 20 year period.. that's why I normally look at larger groups of stocks as opposed to individual issues.

Keep in mind there is at least one known regime shift, I forget the year, but within the last 20 years for sure and possibly within the last 10. So testing for 20 years may be too long. (Depending on the strategy. It is possible to have a strategy is regime independent and in that case 20 years would be fine.)

dwpeters · May 27, 2011

I have been ruling out the Chinese small caps recently. Too many frauds lately. I'm not trading ETFs or large caps because the opportunities are better in small cap stocks.

markd01 · May 28, 2011

Quote from dwpeters:

I have been ruling out the Chinese small caps recently. Too many frauds lately. I'm not trading ETFs or large caps because the opportunities are better in small cap stocks.

I can see your reasoning with Chinese small caps.
Did you consider excluding a subset of ETFs, such as commodity related ones (which have performed poorly in my backtests). According to Larry Connors' research, ETFs have higher win rates than stocks. If you are craving more volatility, there are the 3x ETFs, although there is not as much historical data for them to test with.
How about excluding any low volatility stocks as opposed to all large caps?

markd01 · May 28, 2011

Quote from Stoxtrader:

Keep in mind there is at least one known regime shift... So testing for 20 years may be too long.

I have different time periods optimization on my back burner..

markd01 · May 28, 2011

Quote from Stoxtrader:

RE #6 You specifically mentioned large cap though. I agree that higher volatility is "better" only because that's my personal preference.

I shouldn't have said large caps. I exclude based on low volatility, and it just happens that a lot of large caps fall into that set.

dwpeters · May 28, 2011

Quote from markd01:

I can see your reasoning with Chinese small caps.
Did you consider excluding a subset of ETFs, such as commodity related ones (which have performed poorly in my backtests). According to Larry Connors' research, ETFs have higher win rates than stocks. If you are craving more volatility, there are the 3x ETFs, although there is not as much historical data for them to test with.
How about excluding any low volatility stocks as opposed to all large caps?

I'm a fan of Larry Connors research, but he makes too much of the win rate. His Daily Battle Plan wins something like over 80% of trades but after costs his clients are still likely to lose money:
http://www.cxoadvisory.com/individual-gurus/review-of-larry-connors-daily-battle-plan/

I've done some testing of ETF's and it is worthwhile to look at commodities funds differently, but they are still opportunities ... I just like the opportunities in stocks better.

Rol · May 28, 2011

Quote from markd01:

For those of you swing trading mean reversion, do you trade all stocks or choose to exclude certain sectors, such as:
1) OTC / Pinksheets (less liquidity, higher chance of fraud)
2) Biotechs (extreme overnight gaps if FDA approval/disapproval)
3) Chinese small caps (extreme moves when accused of fraud)
4) Commodity linked ETFs (tend to trend)
5) Commodity related stocks (tend to trend)
6) Low volatility large caps (not enough profit potential)?

Thank you,

Mark

Hi Mark,

I perform nightly scans to generate a "watch list" for the next trading day in the rtm automated system I run. I exclude any stocks with margin restrictions, so I can maximize my buying power. This generally means no OTC/Pinksheet stocks and no 3x ETFs. I am with you on no Chinese pump and dumps. Most of the time, ETFs are not volatile enough to generate signals for me anyway or if they do, then % gains are generally not great.

I just take the risk on news related events adversely affecting me. I figure I will be stuck with a "statistical outlier" every few months, so I only take 100-300 share positions. I figure news related event have just as much chance of helping me, so I view these outliers as just cancelling each other out within my overall profit distribution. Recently had VSEA jump 50% for me on a buyout.

Essentially, if a stock is not volatile enough or trades with too little volume, it will exclude itself from generating a signal within my system.

Rationalize · May 28, 2011

Quote from Stoxtrader:

#3 Exclude any ADR's from any country

#4, #5 Maybe better off trading the commodity directly, not sure why "tend to trend" would mean exclusion

#6 Exclude low volatility any cap, although realize there are many definitions of "volatility"

Why no ADRs? Are we jus talking FX move issues [hedgeable].

Also, why is a wide spread an issue .. if you're receiving it

markd01 · May 28, 2011

Quote from Rol:

I just take the risk on news related events adversely affecting me. I figure I will be stuck with a "statistical outlier" every few months, so I only take 100-300 share positions. I figure news related event have just as much chance of helping me, so I view these outliers as just cancelling each other out within my overall profit distribution. Recently had VSEA jump 50% for me on a buyout.

Rol, how many max concurrent positions per portfolio do you take to diversify away news related risk? Do you try to diversify individual accounts that you trade in, so if one of your accounts is relatively small compared to others, how many positions would you divide it into?

Does everyone else ignore news? How about trading around earnings, guidance revisions, secondary offerings, shorting announced mergers, shorting companies reported to have hired someone to find a buyer for self, etc?