portfolio diversification strategies

Analysis Paralysis can be a real problem | Darwinex has a solution

Analysis Paralysis doesn’t have to be a problem. Looking at too much information can leave you unable to make a decision, overthinking every situation. In trading, you need to feel confident that what you are working on will directly lead you to achieving your goal. 

As with everything in life, there are no guarantees, except death and taxes, of course, but you need to feel comfortable that you have done everything reasonable in your power. Analysis Paralysis detracts from this, leading you to second guess your decisions and use up time wastefully. 

What can you do as a Trader to avoid Analysis Paralysis?

This question is tricky to answer, given that the life of an Algorithmic Trader is to analyse vast amounts of data. The key is to focus on the most important factors. A famous saying that sums this up well is “Don’t Major in Minor Things”. 

Focus on the essential variables first. Then spend less time on the less important ones. This can help prevent Analysis Paralysis. Let’s say you want to look into a strategy that trades UK fixed income or UK equities.

Given that Pension funds and Insurance companies make up over 80% of the traded volume of these assets, it makes more sense to focus on researching the driving forces behind these Institutional Entities than, say, that of hedge funds.

Due to the size of the Pension funds and Insurance companies, it is logical to assume these will impact the market more than hedge funds.

This concept can be increasingly challenging if you want to manage third party funds in some manner. Successful Traders need to be adept at a variety of skills; Market Analysis and statistics, for instance.

But people who manage third party funds have a raft of other considerations to take into account. The first and most important of which would be the qualification you need to comply with your countries regulations.  

Do high-level metrics help with Analysis Paralysis?

Yes. But there is always a trade-off. It would be best if you decided what level of analysis you require for any particular application. You’ll need to determine whether the level of time and effort is warranted.

You may have one or two high-level metrics that filter the order in which you research things further. You could even have a second layer of metrics that filter additionally.

So by the time you’ve filtered most of the valuable strategies, you’ve spent very little time and can focus on those that have the highest potential.

What would this look like?

Let’s say you have developed ten different Trading Strategies. You’ve put together some basic code and have some returns profiles to analyse.

Firstly you could rank them by D-Score. Then start exploring the strategy with the highest D-Score. You can then look at that strategies Investible Attribute scores and rank accordingly. 

Doing this provides you with an order of priority for each of your ten strategies. You also have some mid-level metrics that can indicate which look the most viable.

This filtering process allows you to focus your time on the strategies that have the best chance of success.

Strategies with low scores can go into the ‘another day pile’ that you can investigate when you have more free time. 

This kind of process is vital because trading isn’t a perform once and go to the beach endeavour. Strategies will decay; some will work in specific economic environments but not others. You need to remain adaptable. 

So what’s a D-score, and what is an Investible Attribute?

D-Score is a high-level propriety metric aiming to rank and compare strategies based on several underlying data points. It provides a high-level look at the likelihood of the DARWIN performing in future. 

It’s important to note that past performance isn’t an indication of future performance. However, it can be an indicator of the ability of the Trader. This again doesn’t guarantee success, and you should always do your research. 

The D-Score is a powerful high level metric to use to filter which strategies to focus more of your time on. 

Investible Attributes, on the other hand, give more details into specific areas of a strategy. For instance, the Experience Investible attribute measures the statistical significance of a trading strategy. 

Hold on, what’s a DARWIN?

If you aren’t yet familiar with DARWIN assets, think of them like ETFs or Mid-Cap Stocks. 

Just like an ETF could track the performance of the S&P500, a DARWIN is a financial asset that tracks the performance of a trader’s underlying trading strategy in real-time.

Darwinex manages the risk of investments in DARWIN assets independently of providers, ensuring that they carry a monthly maximum target VaR (95%) of 6.5%.

As these are Proprietary tools, do I need to be a customer of Darwinex? 

To create a DARWIN and attract third-party capital, you need to create a live funded trading account.

However, to use the proprietary tools Darwinex created, all you need to do is create a free basic account and link your existing trading account from your current broker. There is no need to deposit any funds. Just enter a couple of details, and you’re good to go.

You can find more instructions on how to do this here

It only takes a few seconds and gives you access to all the benefits of analysing a strategy using the Investible Attributes. 

If you don’t already filter the trading processes you go through, why not give the above a try and let us know what you think. You can reach us @Darwinexchange

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

Measure Correlation Portfolio Diversification Trading Strategy

Using Performance Metrics in the Optimisation Process

Performance Metrics are a great way of comparing different strategies. We wrote about some of these performance metrics in a previous post.

But is it possible to use performance metrics in the optimisation phase of strategy development? A performance metric is just a way of measuring the success of something. So, it makes sense that you can use performance metrics to measure the performance of a strategy and the components of the strategy.

Experiment

It’s healthy for Traders to explore new ideas and ways of implementing those ideas. Trading Strategy Development can be a creative process. Just because an idea is unique doesn’t mean it will be a success, but you only learn what works by first learning what doesn’t work.

It is also a good idea not to limit yourself to one idea or process. You should perform a range of comparisons and see which one looks the most robust.

Question why you think it works and the others don’t. By constantly trying new things and questioning the results, you will improve your understanding.

This process is helpful because the more you understand, the better equipped you’ll be to adapt to an ever-changing market.

Martyn has provided an example of using Van Tharp’s SQN in the optimisation process instead of comparing trading strategies. Similarly, Darwinex supplies various proprietary metrics that can help a trader analyse and optimise their trading strategy.

Do you use Performance Metrics in the Optimisation Process? Let us know how you get creative on Twitter @Darwinexchange.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only and are not to be construed as financial and/or investment advice.