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Analyzing Backtesting Results and Improving them
StockXcel
| Jun 29, 2023
Synopsis
The document provides guidance on analyzing backtesting results and interpreting them effectively. It suggests visiting the top strategies page, which ranks strategies based on the Sharpe ratio, providing valuable insights into successful and unsuccessful strategies over an eleven-year period. Users are encouraged to download positions for further analysis, examining factors such as maximum drawdown and liquidity of specific stocks.
- Visit the top strategies page.
- The strategies are ranked based on the Sharpe ratio. These results cover an eleven-year period and provide valuable insights into what strategies work and what strategies don't.
- You can download the positions for each rebalancing day, allowing you to perform further analysis on your own. For example, you can examine the maximum drawdown of your portfolio to assess your risk tolerance. Additionally, you can analyze specific stocks to determine if they are too illiquid or if there are any factors you want to avoid entirely. You can also take into account market news related to any of the suggested portfolio stocks.
- The Sharpe ratio is a useful measure of risk-adjusted returns for portfolios.
- Ideally, you want to improve the Sharpe ratio of your portfolio.
- Adjusting the leverage can enhance the returns of portfolios, provided you have a good understanding of the Sharpe ratio.
- Generally, you can improve the Sharpe ratio of your portfolio by adjusting the following factors:
- Market cap: Avoid small-cap stocks due to their riskiness. Apply a market cap filter to exclude them, which can provide more stability in your portfolio returns. However, be aware that you may miss out on potential high-return stocks.
- Holding period: Consider holding periods of 5 days (one week), 21 days (one month), or 63 days (three months) when analyzing the data, as the available data is end-of-day data and may not be suitable for day trading.
- Volatility: Most reasonable stocks have a realized volatility of less than 80%. If volatility exceeds this threshold, it can start reflecting in your portfolio drawdowns. Choose the volatility level appropriately, as high volatility doesn't necessarily mean better returns.
- Volume: Avoid stocks that trade only a few hundred shares per day. Typically, if a stock trades more than 250,000 shares using a 20-day moving average, it is considered suitable for retail investors. However, depending on your risk tolerance, you can set a higher threshold.
- Industry: Apply the industry filter if you have special knowledge about a specific industry or if you want to focus on learning more about a particular industry.
- In addition to the above factors, you can also consider stocks that have performed well in the last day, week, month, or year.
