OmniVest User Forums
User-Created Portfolios
Portfolio Switching
36 replies, 3243 viewings
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OmniVest User Forums
User-Created Portfolios
Portfolio Switching
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Last Activity 7/22/2015 8:11 AM 36 replies, 3243 viewings |
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kmcintyre Elite    Posts: 890 Joined: 10/11/2012 Location: Portland, OR  User Profile |
Personally, I don't mind having to check the performance of N portfolios at month end and then changing the portfolio I'm trading in my live account. Automating the switch would be nice, though... What gets me is the work you had to go through to get your data. And because it is sooo painful to do such research it really thwarts further investigation, such as - 1) What works best? bi-weekly, monthly, quarterly, semi-annual switching? 2) Would a market criteria better determine switching vs. time constants? 3) Would rebalancing (vs binary switching) produce smoother equity curves? 4) How would solving for minimum time between new equity highs work out? 5) How about switching between portfolios specifically tuned for differing market conditions fair? 6) Does switching hold up with any set of portfolios, or are these findings one-offs? Etc. Tools to include simulating portfolio switching based on various criteria would really help. But having hundreds of OV clients running similar simulations (trying to find the answers to the same questions) puts a hardship not only on the clients, but also on the OV systems. Why not have the engineers figure out what works? Why not put a bow on the best 6 - 12 "configurations" and make it easy for users to deploy? And why not engineer evolution into the core of OV so the engineers don't have to constantly tune the configurations? These ideas have been floating around Nirvana for years. ARM, DSS, strategy voting, etc. They just seem to get bogged down somewhere between the white board and profitable deployment. I think Nirvana should offer cash rewards for proven ideas, then integrate them into the core. Kudos on your hard work and initial findings. I hope Nirvana sees the value and devotes some quality engineering to 1) proving the concept and then 2) implementing an elegant solution. Cheers Keith | |||
| Mark Holstius Elite Posts: 744 Joined: 10/11/2012 Location: Sleepy Hollow, IL User Profile |
The returns in these charts are simply from closing down trades and starting new with the next month's portfolio. Since a switch only occurs around 45-50% of the time, the current portfolio often doesn't need to be closed - and the math is simpler. We have a SS that will accurately calculate the results allowing trades to stay open from the previous month and then be closed at their normal time via OV while adjusting the new trades according to the 200% limit. It's quite helpful, but doing that is tedious (downloading 185 months of trades). What I've found when I've done it is that the returns are often better than these because of the value of letting the trades close. I haven't noticed any appreciable difference in TPM or average % Invested. At this point, our process looks at previous characteristics of the 2 portfolios and then chooses one or the other to trade the next month (no peeking ahead...). From 1/1/07 to 1/1/14 (the posted charts) the portfolio chosen for the following month has proven to be the best choice of the two 70% of the time. Keith: You're right about the process being easier if automated. Some of our macros run 8 to 10 hours in excel. (Steve's an amazing SS design and statistics guru - I'm just the macro designer and "grunt work" guy) My hope is that Nirvana may be providing some new tools in the near future that will help Steve & I - and everyone here - test our theories in a much more efficient manner. I'm not planning on any major new "research" until I see what those tools are. Mark | |||
| Steve Mayo Legend Posts: 414 Joined: 10/11/2012 Location: Austin, TX User Profile |
But the fact remains that a 3-sigma event is still very rare in stock returns. So, three-sigma was the high goal that Mark and I set for ourselves. We want to be 99% confident that our switching algorithm is better than random chance. Can we do it? The attached graph shows a 1000-iteration Monte Carlo experiment where we randomly chose between our two source portfolios. The error bars are three standard deviations above and below the mean Monte Carlo equity (dotted line). The red line is the return from our algorithm-switched portfolio. Note that the return on the switched portfolio is showing a better than three-sigma improvement over random chance for most of the 7-year period!! (P-value=0.01 using one-tailed paired t-test for means of Switched vs. Monte Carlo). Yes! We can now say our portfolio switching approach is statistically valid,. And over the last 7 years, as simulated in OV, it generates a 20% higher average monthly return (5.97 vs. 5.0) with a 1% reduction (8.8 vs. 8.9) in risk (standard deviation) compared to our selected benchmark (Nirvana Club’s ARM-4 Margin). In the accompanying distributions, notice how the return has been shifted to the right. Granted, we don’t have 83 years of data to compare against the S&P500, but both of these portfolios outperform the market, by 2.8 and 2.2 points respectively on a risk-adjusted basis. Ed and the Nirvana staff deserve all the kudos for that one! [Edited by Steve Mayo on 3/30/2014 8:42 PM]  Attached file : SD Chart.jpg (103KB - 679 downloads) Attached file : PastedGraphic-15.png (50KB - 677 downloads) Attached file : Monte Carlo To 3 Sigma.jpg (116KB - 695 downloads) Attached file : PastedGraphic-14.png (74KB - 659 downloads) | |||
| kmcintyre Elite Posts: 890 Joined: 10/11/2012 Location: Portland, OR User Profile |
Do you think results from testing two portfolios is sufficient to draw the conclusion that portfolio switching will improve results on most sets of portfolios? In most markets? Intuitively, portfolio switching makes sense provided the frequency of sampling the market is substantially higher than the frequency at which the market charges "personality". Corollary the Nyquist theorem. If the market changes personality faster than the portfolio switching algorithm can deal with, the results will be whipsaws leading to potentially worse performance than holding any single portfolio. The worst case is probably having the market change at the same frequency as the portfolio switcher samples. I'm not saying the sample frequency has to be 2x faster than the shortest market personality change, as Nyquist would imply. I don't believe the markets are sufficiently cyclical to firmly apply Nyquist. Even with Nyquist one has to pick a filter frequency above which cycles are simply ignored. So intuitively portfolio switching can be subject to the same whipsaws seen with moving average crossovers, or any other technical indicator. Pick the wrong sample frequency and I assert it can be harmful. Is monthly switching right for EOD traders? I like it. Probably right for monitoring quarterly changes. A good place to start... I ^REALLY^ applaud you bring statistical analysis to the table. I'm totally convinced that there is enough empirical evidence to warrant further investigation. I hope you get the tools required to make that task much less laborious. I think you too should be a research scientist for Nirvana! :-) Cheers! Keith | |||
| Steve Mayo Legend Posts: 414 Joined: 10/11/2012 Location: Austin, TX User Profile |
I started my career in clinical research as part of the team that developed, studied and obtained regulatory approval for ibuprofen. Now, after 30 years, can I tell you that ibuprofen is absolutely safe and effective under every conceivable scenario? Absolutely not. But, I can say with a level of confidence that, based on well-controlled studies, it is a pretty good choice to treat a headache. And, with my limited understanding of how ibuprofen works at the cellar level, I can say it will probably work just as well for other types of pain. If I’m having a heart attack and have left my bottle of aspirin at home, I will probably take it for that too, but I have no evidence to know if it will work. Give me 30 years and few $billion and I still won’t be able to answer your (obviously rhetorical) question. All Mark and I have said is that the result we are getting with our particular system has some statistical validity, and it looks like the technique has fairly broad potential. For example, the accompanying attachment shows our switching technique applied to another set of portfolios. >> IMHO, there is no benefit to sudden changeover. A blended shift makes more sense to me. << Linus Pauling told us that vitamin C could cure the common cold. After more than 30 trials over 40 years have shown otherwise, a lot of people still swear it works. As traders, and as patients/consumers, we all have our entrenched beliefs, most of which have little empirical evidence to support them. I can test a hard-cut switch each month and reasonably quantify the sources of error (commissions, MOC vs. MOO entry, the robustness of the underlying OV simulations). Conversely, I can’t currently simulate a phased-in switchover with enough confidence to draw any conclusion because it introduces a new hard-to-quantify source of error (which trades will be missed while the equity is tied-up by the carry-over trades). It’s a completely different scenario and the outcome of our work should not be extrapolated to that new scenario >> Why not have the [Nirvana] engineers figure out what works…put a bow on the best…and make it easy for users to deploy? << Just like we all want pharmaceutical companies to give us a little pill that instantly cures our cold with absolutely no side-effects and demand they do it immediately, we want companies like Nirvana to give us that elegant solution that guarantees us huge profits. Oh, if it were only that easy! Mark and I put in hundreds of hours testing various approaches, most of which were failures. And there are thousands more (as many posts have point out) that we haven’t tested. For the same reasons we shouldn’t expect the pharmaceutical industry to develop a new drug until there is enough evidence to support that a viable treatment is within reach, it is unrealistic to expect Nirvana to undertake low-level experimentation until there is a clear market demand and associated commercial viability. In medicine, basic science is done by academia using government funding. For trading systems, that basic science can only be done by interested zealots like Mark and I (and you guys that reads these posts). Let’s recognize that the handful of engineers at Nirvana, as intelligent and creative as they are, could never accomplish as much as several hundred N-Club members all approaching the difficult basic research tasks from different angles. Let’s all rise to that challenge, test our theories and make our proposals, and let Nirvana focus on those with the broadest commercial viability and the greatest benefit to all. [Edited by Steve Mayo on 3/31/2014 5:06 PM] Attached file : PastedGraphic-16.png (73KB - 629 downloads) | |||
| Jim Dean Elite  Posts: 1059 Joined: 10/11/2012 Location: L'ville, GA User Profile |
WELL put. That's the heart of the matter. I can personally attest that Mark and Steve are at least as qualified as scientists and technicians as the good folks at Nirvana are. I saw some early versions of their work ... and I'm not too much of a slouch with Excel or math ... and it really really impressed me. This problem has so very many variables, it is what thermodynamicists (my field) describe as a "virtual open system". That is, there are too many independent variables to manage properly to do a nice clean single-goal goal-seeking analysis. There are many different solution methods. Mark and Steve took several months, as I recall, fiddling with different approaches, till they finally settled on a path that only diverged a couple more times. What they have now, I'm not privy to ... I'm sure it's certainly very very robust. But, having said that ... it's just ONE possible solution-sieve. Who's to say it, or any other method that another team might come up with, is "the best"? I'm very glad that Nirvana is keeping things open ended, rather than totally black-boxing THEIR particular "solution" (as if there were such a beastie). The plans that Ed discussed in the webinar is to offer a Pro level that allows ANYONE with coding experience the ability to develop their own "sieve" that goes far beyond OScript formulae. M&S will likely be able to port their stuff into that engine. Keith will be able to program his own approach there. And others will too, I'm sure ;~) At the same time, N is planning a very SIMPLE "click one button" approach that allows a tyro user to pick one of many Nirvana-optimized "motif" solutions. Those, in addition to the Member level with the V2 features plus more, that we have today. This all was discussed in the webinar, so I hope I'm not speaking out of turn. It sounds like a GREAT plan to me! [Edited by Jim Dean on 3/31/2014 4:58 PM] | |||
| Mark Holstius Elite Posts: 744 Joined: 10/11/2012 Location: Sleepy Hollow, IL User Profile |
The tools you're developing should be a great help to everyone! Mark [Edited by Mark Holstius on 4/6/2014 6:22 PM] Attached file : Latest run.jpg (151KB - 550 downloads) | |||
| Bruce Britt Regular Posts: 81 Joined: 10/11/2012 Location: Louisiana User Profile |
My hat goes off to you guys for your exhaustive research and effort - and especially for sharing you work in an effort to accelerate the development process for the benefit of the group as a whole. Kudos also to Ed and the N development team for recognizing the significance of your findings and for taking immediate action to provide the tools required to implement you concepts. I’ve only been a N Club member for 2 years, but at this point, I’m convinced that joining this group is one of the best decisions I have ever made. Thanks, -Bruce [Edited by Bruce Britt on 4/10/2014 8:26 PM] | |||
| Jim Dean Elite Posts: 1059 Joined: 10/11/2012 Location: L'ville, GA User Profile |
Hip hip hooray! | |||
| JayP Member Posts: 6 Joined: 10/11/2012 Location: pomona, New York User Profile |
Ed just mentioned on the webinar that I had an interesting, but too complex question and suggested I post it on the forum. This seems like the best spot. When "you" set up the choices for optimizing in the PRO version, have you considered working from their "Level" of membership. It would be a different set of strategies for those who can utilize only 5 total systems (bronze) versus the other levels 10(silver) and 20(gold). Are we considering making the "Pro" level available to all, or just those at Gold and Platinum levels. Getting meaningfully into Portfoio Wizard might only be possible for those of us who are Platinum members. Would there be a way of "suggesting" the optimal number of strategies if one were a platinum member. I'm thinking of Mark's thread on optimal number of strategies and how it might tie in . I love what you guys are doing. Thank you so much. | |||
| Steve Mayo Legend Posts: 414 Joined: 10/11/2012 Location: Austin, TX User Profile |
I can't speak to Nirvana's business strategy, but from what we've been discussing the port switcher/balancer tool will work with whatever portfolios you have, regardless of your membership level. If you have, say, Bronze level, you are limited to portfolios that have only 5 strategies. You can still assemble lots of different portfolios, and the OV-Pro swticher will use whatever ports you have, hopefully resulting in a "switched" portfolio/system that does better than any of those. Conceivably, and I'm only postulating now, OV3 and the Elite Trader program will enable a Bronze or Silver user to subscribe to larger portfolios (more strats) than he/she could otherwise build at his/her membership level. For example, Mark or I might publish a "system" that switches between 2 or 3 of our best portfolios. Under the Elite program, I would think any OV user could subscribe to it regardless of membership level, but to be fair to Gold members, I would expect bronze/silver users might have to pay a higher monthly fee. That said, the cost to upgrade to Gold membership is trivial compared to the dramatic improvement you get from using 10 or more strategies in a portfolio. With a bit of work in Strat Lab and with the right list, one can now get higher returns with only a few strategies, but it generally takes more risk compared to the smoother ports you get with 10 or more strategies. | |||
| Jim Dean Elite Posts: 1059 Joined: 10/11/2012 Location: L'ville, GA User Profile |
Truly a wonderfully versatile architecture, offering unparalleled degrees of freedom for minuscule amortized cost. [Edited by Jim Dean on 4/10/2014 10:24 PM] |
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