Performance difference between various look back periods in relative strength model - How do we know what will perform better in the future?

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Performance difference between various look back periods in relative strength model - How do we know what will perform better in the future?

posted

Hi all,

New to the forum, and to this type of investing. I have been working on a relative strength rotation model, but I have a hard time understanding why the backtests show so different performance results depending on what look back period i put in.

3 month delivers more than twice the return as a 12 month look back period, and that is concerning to me. I would expect more similar returns, since momentum has been shown to deliver results on a 3-12 month look back period.

3 month look back period has produced great results for the last couple of decades, but how do we know it will continue?

Most of us only have very few decades to invest in, and it would be very problematic for ones performance if the optimal look back period in the future differs from what was chosen for the model.

How do you guys handle this in your modelling?

Best regards
Lars

1 response

Just a suggestion, pick several different look back periods (e.g. 3, 6, 9, 12 month), sum the returns, then take the average.
You could even weight the returns differently before summing perhaps giving more weight to the more recent returns.

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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.