How do you know if you have a good algorithm?

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How do you know if you have a good algorithm?

James Hutchison

posted Jul 13, 2016

So I have my VIX bot written and it's feature complete. It relies on VIX etfs, so it can't really backtest further back than late 2012.

Back testing from Jan 1 2013 to yesterday, it would have been up 465.4% with 100k capital.

Alpha 1.22
Beta 0.54
Sharpe 5.45
Sortino 7.98
Information Ratio 4.78
Volatility 0.24
Max drawdown 13.6%

When comparing returns to drawdown, I think this has beaten anything else I've seen on these forums, but I'm wondering if maybe people have algos that do quite a bit better with less risk and they just haven't shared them since they realized they have the real deal. I'm also concerned if that that timeframe is insufficient, since we really haven't seen the VIX go up to anything that would threaten a short-the-vix strategy that badly.

How long should I let this thing paper trade for before moving to real money? I feel like the only thing it is untested with is true market turmoil, or black swans, which we may not see anytime soon.

1 response

Behavioral Trader

In a bull market, going long SPY, or conversely, short the VIX, is a no brainer, right?

Depending on what instruments your algo "trades", you may find that those are hard to borrow, so your stategy might not be implementable. If you are good at options, you can try to do a synthetic short, but it will cost you in transactions, slippage, liquidity risk, and time to manage.

"better with less risk and they just haven't shared them since they realized they have the real deal"

I am sure some exist, given the law of large numbers. There are 80K "developers" here, and at one per developer, that is 80K algos, of which 1% should be very profitable on a consistent basis, either due to skill or luck. There is no "real deal" though, since backtesting plus out of sample performance for a couple of years does not guarantee future performance whatsoever.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.