Steve Mayo Legend  Posts: 414 Joined: 10/11/2012 Location: Austin, TX  User Profile | Portfolio optimization is a much more difficult objective. Determing the best set of 5 out of 100 choices takes 75 million permutations. Crank that up to the best-10 portfolio and you jump to 17 trillion permutations! And now with v2, we have a lot more than 100 strats to choose from. Iteratively adding strategies to a mix (ISS) sounds like a promsing way to reduce the number of permutations, but you have to understand how OV works to see why it may not be. When you add the next strategy to the current mix, OV is now presented with a larger set of candidate trades to take each day. OV now might take a trade from this newly-added strategy and then not have the equity available to take the trade it took from the original set of strats. It's not additive/subtractive, it's different. (Statistically speaking, there is a high degree of nonlinearity.) Which means it is essentially unpredictable and we are back to doing all those permutations again. Conversely, portfolio switching requires only adding the ability to calculate a single formula that ranks a few candidate portfolios and a trading rule that switches between (or out of) them based on that ranking. If you start off with some fairly good portfolios (and Nirvana is promising us lots of them!) then your downside is limited to just the worst of the best. When switching, say, between 2 good portfolios, as long as your algorithm accurately switches to the better portfolio for the coming month more than 50% of the time, you should do better than trading one of those ports individually (yes, I know ordering of wins/loses matters but that's a different post). Mark and I have now shown two examples that are accurate more than 50% of the time, and it didn't take 17 trillion calculations. Plus, portfolio switching is an easy concept for novice traders to understand and could be applied to switching between Nirvana-created portfolios. The user would not have to know how to write a formula -- Nirvana could do that and then simply let users trade that "system of portfolios" as an alternative to picking just one. Rather than devolve into an ISS debate, let's move that to another message string and keep this one focused on portfolio switching. Thanks! [Edited by Steve Mayo on 3/31/2014 2:00 PM] | |
