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Further Experiments with Randomness

Recently I developed a peculiar interest in randomness and have been tweaking trading algos related to random numbers, inspired by the ideas presented in Getting Sid Programmatically by Ha C. I tried to pick random stocks and trade them - which I and apparently Ha and Fawce think are too risky. The I tried to pick multiple random stocks and trade the interesting stocks among them. The rationale is, assuming that each stock in the universe can be uniformly chosen, the expected return for the strategy that we buy the lowest price stock and sell the highest price stock would be positive - meaning that we can eventually make money. This is a right assumption but unfortunately it didn't work well since the volatility is too high. I realized that random numbers are innately unreliable, so I instead spread the risks into multiple drills (in this algo, 100 times per period) over multiple stocks (choosing the highest/lowest value stocks over 10 random stocks). It turns out that both strategies greatly reduced the volatility while most of the time yield positive gains.

From this simple experiment I believe that to some extent randomness can be of great help without making us suffer from potential huge losses.

Clone Algorithm
Backtest from to with initial capital ( data)
Total Returns
Information Ratio
Benchmark Returns
Max Drawdown
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
Information Ratio 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: 516e33d243e7fd065d50335b
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5 responses

Interesting Idea. I was trying to do something similar with Binary Options through Nadex but do not have any clue of how to go about doing that. However, like you mentioned, if you Buy or Something at peaks, which -may- mean a higher chance of the security moving the way you want it. I too thought, that if I may do this enough my results may end up coming up positive. Interesting Idea! I've been messing with Currency Pairs however.

This is almost certainly just a high variance causing a randomly high result. The strategies underlying assumption, that buying one stock at a low notional price and selling another at a high price doesn't really make much sense. There may be some sort of underlying pricing effect in the market, but it would be at the margin, and you'd need a more directed strategy than this.

@ Kyle: Thanks for your comments. I would love to hear more about it, though. Let us be a bit more clear about the assumptions: given that the stocks are on the same universe, we assume that they have similar performances, i.e. each stock tends to average value within the universe. Therefore, probability theory has it that expected return is larger than zero as long as the random method is truly random. I was wondering which part you think makes no sense.

@ Taibo: Right, I agree with that assumption. That is, that randomly chosen stocks should have a similar probability distribution of returns as others within the universe. So, you're right in that, if you just randomly chose stocks, you will get the average return (on average, hah) So, this is positive in the long term, I guess I meant that you won't be seeing outsized returns.

Also, correct me if I'm wrong but I was under the understanding that this more than that strategy. This algorithm buys the lowest priced stocks, and sells the highest priced, correct?

@ Kyle: Thank you for your clarifications! I experimented with three indicators: price, volume, and active market value (price*volume), and found that the third one works the best. Probably you can also try price or volume to see if they work better in other universes or with other parameters. Yeah basically I sell the highest priced/traded and buy the lowest priced/traded with the hope that overall return is positive. Any comments?