What Quant Models Can Teach Us About Trading Psychology

Above we can see SPY (blue line) plotted against a six-variable trading model that I developed using ensemble modeling. When we have a positive score, the model is deemed to be bullish over a next 10-day horizon. When we have a negative score, the model is deemed to be bearish. The model is flat as of yesterday's close. The model includes such variables as market volatility, breadth, buying/selling participation, and market cycle status.

When the model has been at a score of +2 or higher, the next 10 days in SPY have averaged a gain of +2.08%. When the model has been at a score of -3 or lower, the next 10 days in SPY have averaged a loss of -.83%. Between scores of +1 and -2, the next 10 days in SPY have averaged a small loss of -.08%.

The model has a couple of important implications for trading psychology:

1) Out of the 573 days of my in-sample and out-of-sample periods, nearly half are scores less than +2 and greater than -3: in other words, days with essentially no edge 10 days out. That doesn't mean sources of edge can't be found on different time frames with different models, but this finding is important. Even with a solidly researched source of edge, there are plenty of occasions when not trading is the best trade.

2) The model signals have been good, but even with their edge, there is plenty of noise. Note, for example, that the model was bearish during much of mid-2015, when prices chopped around quite a bit. We were also bullish during fall, 2015 during a volatile bottoming period. A trader could have an edge with a model but be unable to survive the noise around signal, especially if sized quite large.

3) I suspect the model works because it's exploiting cyclical behavior in markets at a time frame that is too long for active traders and too short for true investors. A key to trading the model, as we've seen, is not placing trades when there is no clear signal. There have been no solid signals from the model in the last 14 trading sessions; such periods are not rare. It's the selectivity of the model that might be its greatest advantage.

4) Such models don't have to be traded mechanically. For instance, a short-term trader could use the model to decide when to trade with a directional bias and when to take short-term setups without such bias. More fundamentally grounded traders could use models such as these to help with the execution of longer-term positions. Good models provide good information; that information can be useful in discretionary decision making.

The act of developing models itself gives one a feel for markets. The model inputs are there for a reason: the model simply captures when those reasons line up. It is interesting that the most rational of analyses can feed the deepest intuitions.

Further Reading: The Psychology of Quant Analysis
.

Benefits Of Healthy eating Turmeric every day for the body

One teaspoon of turmeric a day to prevent inflammation, accumulation of toxins, pain, and the outbreak of cancer. Yes, turmeric has been known since 2.5 centuries ago in India, as a plant anti-inflammatory / inflammatory, anti-bacterial, and also have a good detox properties, now proven to prevent Alzheimer's disease and cancer. Turmeric prevents inflammation: For people who

Women and children overboard

It's the Catch-22 of clinical trials: to protect pregnant women and children from the risks of untested drugs....we don't test drugs adequately for them. In the last few decades , we've been more concerned about the harms of research than of inadequately tested treatments for everyone, in fact. But for "vulnerable populations," like pregnant women and children, the default was to exclude them. And just in case any women might be, or might become, pregnant, it was often easier just to exclude us all from trials. It got so bad, that by the late 1990s, the FDA realized regulations and more for pregnant women - and women generally - had to change. The NIH (National Institutes of Health) took action too. And so few drugs had enough safety and efficacy information for children that, even in official circles, children were being called "therapeutic orphans." Action began on that, too. There is still a long way to go. But this month there was a sign that

Not a word was spoken (but many were learned)

Video is often used in the EFL classroom for listening comprehension activities, facilitating discussions and, of course, language work. But how can you exploit silent films without any language in them? Since developing learners' linguistic resources should be our primary goal (well, at least the blogger behind the blog thinks so), here are four suggestions on how language (grammar and vocabulary) can be generated from silent clips. Split-viewing Split-viewing is an information gap activity where the class is split into groups with one group facing the screen and the other with their back to the screen. The ones facing the screen than report on what they have seen - this can be done WHILE as well as AFTER they watch. Alternatively, students who are not watching (the ones sitting with their backs to the screen) can be send out of the classroom and come up with a list of the questions to ask the 'watching group'. This works particularly well with action or crime scenes with

Humor4u

Search This Blog