Notebook

The Search For Profits

Quantopian is searching for a low drawdown stock trading strategy. Its stated goal being to margin it as high as 6 times. The restriction being a near zero beta, low volatility portfolio. The presented strategy is marginally acceptable. Its beta is 0.38 compared to the stated limit of $\pm$ 0.30. Also, the drawdown is higher than wished for. However, there are attenuating circumstances.

Evidently, if you want to margin 6 times, the drawdown figure better be small. Six times a small drawdown near 0.10, will still something close to 0.60. Hopefully less, but still, tending to it.

There are other ways of doing this.

For instance, the following strategy can do the job, and in a different way.

The Spy Who Loved WVF or Just Another Volatility Spy Strategy

This trading strategy is not mine. Everyone on Quantopian should recognize it. I do not know exactly who the author is. I do not have its history. All I did was clone it and started changing parameters to see how it behaved.

I usually go for the pressure points. Not necessarily changing the code, but to see if the trading strategy is scalable for instance, and if so, how far. The only way to find out is to make some tests.

So here is that strategy, which I consider a diamond in the rough, that can do more simply by adding some pressure to it. The first observation being that the strategy can in fact handle it.

For sure, if you want more profits, you will have to take more risk. It is an understated market axiom. You want more, then you will have to do more. Evidently, all within the restrictions you might set.

I use the following strategy version: https://www.quantopian.com/algorithms/58954885a7d6014540d54cbd. This one was a modification of a modification, the last one of which was done by T. W. I made some really minor changes. Not in the code, but for some of the paramters.

I wanted to know if it scaled upward well. That is easy to do, you simply raise the initial capital. I also wanted to know if it could survive some leverage. Since Quantopian has for intention to leverage some of their systems. Might as well find out how far this one can go.

Leverage

I limited leverage at 2x.

Test Results

Test Settings: From 2011-01-03 to 2017-02-02 with $\textbf{1,000,000}$ initial capital.

Total Returns: 8642.1%

Benchmark Returns: 103.5%

Alpha: 0.78

Beta: 0.38

Sharpe: 1.91

Sortino: 2.99

Volatility: 0.43

Max Drawdown -27.5%

Those might appear as ordinary numbers, but not quite.

If Quantopian is ready to leverage 6x a less than 10% drawdown strategy. Here is one that is less than 30% and able to generate a much higher output.

Sure it might appear more risky. But this is still a first draft, a preliminary exploration into what makes this strategy tick.

Here is the strategy's full tear sheet.

In [2]:
# Get backtest object
bt = get_backtest('5895445a1b4cb74460004852')

# Create all tear sheets
bt.create_full_tear_sheet()
100% Time: 0:00:01|###########################################################|
Entire data start date: 2011-01-03
Entire data end date: 2017-02-02


Backtest Months: 72
Performance statistics Backtest
annual_return 1.09
annual_volatility 0.43
sharpe_ratio 1.91
calmar_ratio 3.95
stability_of_timeseries 0.98
max_drawdown -0.27
omega_ratio 1.41
sortino_ratio 2.99
skew 0.19
kurtosis 3.33
tail_ratio 1.14
common_sense_ratio 2.38
information_ratio 0.10
alpha 0.79
beta 0.37
Worst Drawdown Periods net drawdown in % peak date valley date recovery date duration
0 27.50 2016-07-08 2016-11-14 2017-01-24 143
1 21.41 2015-02-02 2015-03-11 2015-04-10 50
2 20.26 2013-08-05 2013-10-15 2014-01-15 118
3 19.75 2013-05-02 2013-06-24 2013-07-15 53
4 17.84 2011-10-03 2011-10-14 2012-01-03 67

[-0.051 -0.099]
/usr/local/lib/python2.7/dist-packages/numpy/lib/function_base.py:3834: RuntimeWarning: Invalid value encountered in percentile
  RuntimeWarning)
Stress Events mean min max
US downgrade/European Debt Crisis 2.05% -11.68% 14.76%
Fukushima 0.24% -3.46% 4.48%
EZB IR Event 0.07% -6.52% 7.25%
Apr14 0.69% -7.81% 4.35%
Oct14 0.45% -4.82% 4.47%
Fall2015 0.02% -9.33% 6.40%
Recovery 0.45% -11.68% 14.94%
New Normal 0.27% -11.33% 13.41%