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First algo, would like some feedback - volatility weighting

This is my first algo that does better than SPY without leverage. It's uses volatility weighting on a universe selected via fundemental's grades.

I'm going to work on a better stock pick goal. This is what I had in mind:
1. Smaller market cap S&P 500 companies.
2. Companies that are growing versus companies that are "established"
3. Positive averages. (Haven't gotten the momentum example to work well, will be researching other fundamentals)

Here are a few things I would like to learn more about:

  • How can I decrease my beta and drawdown?
  • What are some strategies for transitioning to daily trading?
  • What are some hedging strategies?
    • I was planning to try hedging on high-volatility or inverse-weight volatility.
  • Can limit and/or stop-loss orders benefit my algorithm?
  • Any other feedback!
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Backtest from to with initial capital
Total Returns
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Alpha
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Beta
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Sharpe
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Sortino
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Max Drawdown
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Benchmark Returns
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Volatility
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Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 55ebf2af1286620dd6a13b76
There was a runtime error.
2 responses

Hey Nathan,

Nice work. This is a well-developed first algo. As you point out, the main problem is that your algorithm tracks the market very closely. I would look into what companies your get_fundamentals returns: I suspect that it might return companies that don't quite reflect your objectives in 1. and 2. I don't think this kind of strategy would benefit greatly from limit or stop losses. Maybe think about using VIX/VXX in some fashion? Your hedging strategies sound fine -- you can also think about using an equity long-short strategy to hedge against risk.

One good way of testing out your algos ability to pick out stocks and weight them is to inverse your vol weighting. Or switch sign if it's long/short. For the amount of outperformance on your strategy, if you reverse it, you should expect an equal amount of underperformance