For the past 2 weeks or so I have been investigating the Core momentum strategy and adding a frog-in-the-pan component (more on this in a later post). I had been running my simulations using a sell rule of Rank < 95, based on my (apparently mistaken) belief that holding lower ranking stock in lieu of higher ranking stocks represented opportunity costs. In my simulation I would buy 50 stocks for the 6 different stock universes: S&P 500, S&P 1500, Pr 1000, Pr 2000, Pr 3000, and Easy to trade. Finally, I decided to change the Rank < 95 to Rank < 60. Imagine my surprise when I found that usually (though not always) CAGR would INCREASE, Sharpe ratio would increase, sometimes Max DD would increase (i.e., be less negative), and annual turnover would go way down (no surprise in the last statistic). So my question is this: has anyone on this forum done extensive research on sell rules for rank using different values? If so, would you share the research results with me?
When I’ve noticed that dropping the Rank sell constraint leads to increased Sharpe or CAGR, it’s often because the strategy turnover was too high at the original Rank threshold, so the transaction costs (slippage and commission) at eating away at too much PnL. Because these transaction costs are baked into your strategy’s transaction prices and not captured as separate columns, the totality of these costs is not always immediately apparent.
What is your rebalance period, and before-and-after annual turnover? And what are your strategy’s commissions and slippage set to?
I just checked one of my strategies, and I do see “Tot Fees” listed per order on the Transactions tab, and "Total Trading Cost’ displayed under the Statistics/Trading tab, so this is visible. I’m not sure if I just missed it before, or if it was added recently.
I have been using a rebalance period of 4 weeks, a commission of 0.005 per share, and a slippage of 0.5% variable. I think those values are the defaults.
Regarding the before and after turnover rates, I think I will post the results once I finish my analysis. While I was awaiting an answer from someone on the forum, I decided to look at all of the core ranking systems in addition to my version of momentum. I have only completed the “Growth” ranking system so far. What a surprise with it! But once I finish the other core systems, I will post the results and perhaps show a better picture.