I don't understand why maximizing returns yields much worse performance than maximizing (price - price*returns).
I've attached my returns maximization algorithm here.
Why does maximizing returns perform worse than maximizing (price - price*returns)
You observe that Max(returns) results in worse performance than Max(price - price*returns) = Max(price*(1-returns)).
Honestly i don't know the answer, but i think your returns are 1-day returns, right?
So that seems to me to imply that there is a tendency for higher prices (positive 1 d returns) generally to be followed by lower prices (negative 1d returns), which is consistent with a general tendency toward short-term Mean-Reversion type of behavior. Does that make sense?
It makes sense in theory, but I've extended the time window and am seeing the same thing.
They are one day returns but I get similar results for 20 days (pure returns is only down 20%). For 200 days pure returns has a positive return (about 5%) and (price - price*returns) has returns of ~10% - slightly worse than the shorter time windows.
One question. What is the term price - price*returns or, written another way price*(1-returns), supposed to represent? It's probably obvious but help me out.
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I am very sorry. Still don't get it. Wouldn't yesterday's adjusted price be
price_yesterday = price / (1 + returns)
# Start with the definition of returns then do some algebra...
returns = (price - price_yesterday) / price_yesterday
returns = (price/price_yesterday) - (price_yesterday/price_yesterday)
returns = (price/price_yesterday) - 1
1 + returns = price/price_yesterday
price_yesterday = price / (1 + 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.
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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.