Testing Across Markets, Trigger SIgnals, Signal Breakdown [New Update]

I wanted to give this latest version of Build Alpha its own blog post as there are a few features that deserve a more thorough explanation to fully understand their power. I will highlight three of these new features below.

1. Testing Across Markets

The latest version allows the trader/money manager to develop strategies across a basket of instruments as opposed to just one symbol. For example, one can select Gold, Oil, SP500 and 30 Year Bonds (as well as thousands of signals at once) and the software will find the best strategies based on the combined performance across the selected instruments. You can also build trading strategies that are trained on various timeframes at once. For example, a basket can consist of 30 minute data, 240 minute data and daily data and the software will find the strategies that work best across all these timeframes. I first mentioned this technique of testing across markets to reduce the chances of curve-fitting in this blog here: https://www.buildalpha.com/3-simple-ways-to-reduce-the-risk-of-curve-fitting/

Testing across markets (and/or timeframes) is a great way to find robust strategies that generalize well and help to combat over-fitting. If you don’t believe me, take Jaffray Woodriff’s word for it. Woodriff, the founder of $3 Billion Quantitative Investment Management, was recently in the news for his $120M (yes, million) donation to the University of Virginia’s data department. In the book Hedge Fund Market Wizards, Woodriff was asked what changed from his early years when he was slightly down for two straight years to when he made over 80% in just the first six months of the following year. Here is his response straight from the book

“I started to figure out that the more data I used to train the models, the better the performance. I found that using the same models across multiple markets provided a far more robust approach. So the big change that occurred during this period was moving from separate models for each market to common models applied across all markets.” Pg. 146

Furthermore, if (when) the market changes then strategies built on multiple (and even better, diverse) markets should stand a better chance of surviving as they’ve been built across different data sets.

Build Alpha now makes it incredibly simple to build and test ideas and strategies across multiple markets at once. Just select one or as many markets as you prefer from the drop down menu and Build Alpha will return the results of the strongest strategies built across the entire basket. The ability to analyze the aggregated results as a basket as well as analyze the individual components is extremely simple.

Basket2

The top row is the aggregate performance of the entire basket denoted by the symbol ‘BSK’. If you click the top left arrow it will drop down the basket’s components with their respective indiviudal performance.

Note: I am not saying that single market models do not work! They most certainly do, and there are certainly players that only participate in specific markets thus creating idiosyncratic patterns and opportunities. Of course the Build Alpha trader can still search for single market models in BA as well. Flexibility is always key!

2. Trigger Signals

A trigger signal is the combination of two rules or signals occurring within a specified time window. We assume the main signal is occurring right now and then require that the second signal – the trigger signal – had to occur at least once in the last N bars for the full combined signal to be valid.

A simple example is to consider these two signals

  1. Close crosses above the 20 period SMA (main)
  2. Close is below the lower Bollinger Band at any time in the last 5 bars (trigger)

If we cross above the 20 SMA today and at any point in the last 5 bars we also closed below the lower Bollinger Band then we have an active signal.

Adding a ‘trigger’ to a signal can greatly improve the edge of the main signal. I ran a simple test using the above Trigger Signal on a basket of securities (ES,NQ,US,SPY,QQQ,TLT) and viewed the combined E-Ratio.  The original main signal (with no trigger signal) is seemingly random with an aggregated E-Ratio of only 1.02. However, adding the trigger signal jumped the E-Ratio to 1.39 – a 36.27% improvement.

Additionally, the E-Ratio for the main signal when just considering the 30 Year Bond Futures (symbol US) improved about 100% from 1.05 to 1.92 with the addition of the trigger signal.

To create trigger signals simply go to File -> Custom Indicators and set type to Trigger. Here is an example of the above Trigger Signal:

And here is a visual (pink dot is a true signal with trigger and blue dot is a true signal without trigger)

More on these in future upgrades..

3. Signal Breakdown

The final new feature I want to discuss allows us to view EVERY signal Build Alpha has (currently 5000+) and the likelihood it occurs on our winning trades as well as the likelihood it occurs on our losing trades even if it is not included in our original strategy’s rules. Why is this helpful? Well this can give us insights into what signals, rules or filters we can add (or exclude) to improve a strategy.

For example, if you knew that a specific signal occurred on 75.32% of your winning trades and on only 14.75% of your losing trades would you want to include this rule in your strategy to see if it improves results? Of course.

Additionally, if you knew that a specific signal occurred on only 18.37% of your winning trades but on 84.69% of your losing trades would this not be a rule you’d want to exclude from your strategy – in other words, avoid trading when this rule is true as it appears only true on losing trades!

The Signal Breakdown can be a powerful tool to help improve, tweak and understand strategies. However, caution is advised to still follow proper testing procedures such as in and out of sample testing, etc. There are other posts regarding this matter.

Why doesn’t Build Alpha find these rules initially? It does, but the user also has the ability to limit the software to generate the best strategies only using a user specified maximum number of rules. If the user wants to later add an additional rule then using the Signal Breakdown can lend insights into which additional rule(s) to add.

 

As always, thanks for reading and your support. It means a lot.

Thanks,

Dave


Leave a Reply

Your email address will not be published. Required fields are marked *

Login


Username
Password
(close)

Create an Account!


Username
Email
Password
Confirm Password
Want to Login? (close)

forgot password?


Username or Email
(close)

Risk Disclosure

FUTURES AND FOREX TRADING CONTAINS SUBSTANTIAL RISK AND IS NOT FOR EVERY INVESTOR. AN INVESTOR COULD POTENTIALLY LOSE ALL OR MORE THAN THE INITIAL INVESTMENT. RISK CAPITAL IS MONEY THAT CAN BE LOST WITHOUT JEOPARDIZING ONES FINANCIAL SECURITY OR LIFE STYLE. ONLY RISK CAPITAL SHOULD BE USED FOR TRADING AND ONLY THOSE WITH SUFFICIENT RISK CAPITAL SHOULD CONSIDER TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Hypothetical Performance Disclaimer

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.