I understand people could be skeptical. I would too.
It was my major concern even before writing the book. It took 197 pages to explain the development of this innovative trading strategy, and only part of it was chronicled live on this website. My very first comment was: “@Rao, you must be aware that your robot-advisor can do more by feeding more to the CVXOPT optimizer.”
What I presented is a long-term trading strategy, and as such, it does not have a short-term perspective even if it will profit from it. Look at the equity chart. The first 3 years appear as almost flat while the last 3 are on an exponential curve. My interest is mainly on those last 3 years and beyond where it counts the most. But to get there, you had to be there all the way letting the strategy accumulate trading profits and shares.
@Vladimir, intentionally, the code is not in the book. The book's objectives are to provide the tools to transform your best trading strategies using controlling equations to guide your portfolio to higher levels. And not just blindly follow someone else's strategy, but transforming your own into something more. This way, you would better understand what your trading strategy will be required to do and gain the needed confidence to apply it since it would then be your own creation on your own machine where you could control it at will.
I do not want to be responsible for anyone misusing or misunderstanding my strategies. If people created their own on the same theme, it becomes their responsibility to manage them as they see fit, not mine. All I wanted to do was provide an example of what can be done which could be replicated in many other ways by anyone once they understood how it is done. I expect everyone's solution to be implemented differently, and that is great.
The presented strategy is governed by equations. I added components one at a time, at first with a total disregard for protective measures and later on gradually bringing on those protective measures designed to lower the total drawdown. But not necessarily the volatility or the beta, even if it did do that too, especially the beta.
@Jamie, I do not see your comments as hijacking. In a way, they turn out to be legitimate questions.
Is the trading strategy overfitted or not? I answer no. The optimizer is in charge of the trading activity. Therefore, the question should be: Can I overfit the optimizer? For sure, I can influence it, but is that overfitting? I still do not know when it will trade, which stocks will be affected, how many shares will be bought or sold and when. If I am in the dark as to what the optimizer will trade, if it does, am I overfitting?
The whole code section of the optimizer was not changed. And, as said, I have chronicled the additions of several equation components I used as part of the administrative procedures taken. I certainly could not have done that in a single step. But see my post: https://www.quantopian.com/posts/built-robo-advisor#5c6d8a5c8d26700facd50187 where the progression of some of the steps was provided. Add a feature, and if the program crashes, debug, and repeat.
These additions started relatively low and progressively as I added the driving components of the equations, performance went up. This was not optimizing parameters, it was adding functionality (features) expressed as long-standing equations. And I did them one at a time. The reason is simple, it is easier to debug if it is done as an iterative process. Again, you do some modifications, re-run the program to see it terminate without a crash. Then, you continue.
These equations are spanning the entire trading interval. It was not just a trade here and there that was affected, it was all of them, every single one, oftentimes, just by pennies.
Another point is: it did not matter which stocks were picked to show the trade mechanics of this strategy as long as they fitted my selection criteria. With the same basic version of the program which gave you 7,967% total return for the same six stocks using the same optimizer, the question is:
How can you add alpha to a group of stocks that already showed alpha? And how can you raise this alpha to reach 200,000%+ while keeping it scalable, sustainable, marketable, and executable?
What you learn in doing that will also serve you with other stock selection schemes. The real added alpha here is from the 7,967% total return strategy that is gradually being raised to 200,000%+.
Nobody here is trading using equations, or administrative procedures, for that matter. Nor have I seen anyone discussing controlling their trading strategies. And this is sufficient to call my version of the original program innovative and unique on Quantopian. I use regulators, amplifiers, dampers, and booster functions and equations. Never seen any of that here. I even have a cruise control made to override the system by accelerating or slowing down the whole stock acquisition process. Again, stuff never mentioned on Quantopian.
Does using an equation equates to overfitting? What a philosophical question? Is a positive monotonic equation a mystical creature because it only goes up? Or, because it only goes up, then there must be something wrong with it. How about you just designed it to do that?
This trading strategy, my version of it anyway, is operating in a totally different category. It exists beyond the efficient frontier where it is seen to thrive. All it did was jump over that barrier. When I will have corrected the 6-stock limitation, it will do as much with a lower volatility setting as demonstrated in my prior book which again was based on stuff found on Quantopian, but does provide the theoretical background for this strategy. This strategy is simply the practical application of what was presented in that prior book.
Here is a funny observation: because you found some stuff on Quantopian that you could use or transform, does it make it false?
No one needs to buy my book. I did not write it for the money. However, I think I have provided enough stuff here and on my website over the past 8 years for anyone to understand what is being done and do even better.
The last page of my book ends with:
“Your task, going forward, will be to monitor your program and see that your trading strategy behaves correctly and according to your plan.
Since you are in control, it becomes the game you play, the one you constructed, within the game.
You want more, then prepare, and definitely do make it happen.”
At some point, someone will understand what this strategy is all about and create their own to do even better. And I can assure you, they will not make it public.