The Life In Addition To Expiry Of A Strategy

Sometimes it is instructive to hold off dorsum at some strategies that used to thrive, in addition to hence quite of a abrupt contracted a chronic affliction that ultimately led to its demise. It gives us a feel of the unreliability of backtests in addition to curb our over-confidence, which is e'er useful when dealing amongst the fiscal markets.

One skillful instance is a well-known strategy that nosotros called "buy-on-gap". In its simplest version, only purchase at the opened upwards 100 stocks inside the S&P500 which accept the lowest returns from their previous day's lows to the electrical current day's open, provided that these returns are lower than ane criterion deviation. (The criterion departure is computed every bit the 90-day moving criterion departure of close-to-close returns of a stock.) Exit such  long positions at the day's close.

Many traders know of variants of this strategy, in addition to I started trading it to a greater extent than or less the initiative of all of 2007, in addition to inward fact, it formed role of my initiative of all fund's portfolio of strategies. You tin post away run across the cumulative render nautical chart below (click to enlarge) from 2007/01/03-2008/10/29. The APR is 19%, unlevered. The Sharpe ratio is 1.4 in addition to the maximum drawdown is only 4%. Note that Lehman Brothers went bankrupt on 2008/09/15, in addition to this is a long-only strategy, notwithstanding the surgical physical care for was spectacular inward September-October 2008. We were patting ourselves furiously on the back.

Now hold off what happened afterward this happy period.

 The APR was -6%. 2008/10/29 turned out to endure the high watermark.

I accept seen some strategies that accept the contrary behavior: misfortunate surgical physical care for prior to 2009, in addition to stellar surgical physical care for since then. Was in that location a structural interruption inward the marketplace due to the fiscal crisis? Was this due to the advent of high frequency trading? The declining book inward the equities market? I volition run out these deep questions to fiscal economists. The entirely lesson I accept learned from this in addition to other examples is that, in ane trial a strategy is inward spend upwards for some time, it seldom comes dorsum to health, in addition to the best course of written report of activeness is to bury it swiftly.