# of Entries...........8 # of Exits............10 WinRatio..............70.00% Portfolio's ROI.......+3.38% Market's ROI..........-0.10%
One of the challenges of trading this system is signal selection. The system generates more signals than money available. A ranking algorithm aids in signal selection and brings the portfolio closer to the signals the simulation would have taken.
Over time, I have developed a negative bias towards certain signals. By skipping these outliers; I am distancing my portfolio's results from the simulation's results. And I'm struggling with this. What would be ideal is to identify the quantitative nature of these outliers and add to the system's rules. Of course, after rigorous testing. Until then, I'm left with this uneasy balance between trading the system and using bias in my signal selection process.
Case in point: several of the signals lately (as of 04/12/11) could possibly be held during earnings announcements. I try to avoid holding a stock over its earnings announcement. Yet, the system's simulation tests did not contain this rule set and continued to produce excellent returns overall. Testing my bias is difficult due to the various earnings dates involved. Foregoing earnings season all together in simulations is not an option due to the cash drag effect. One solution to this problem is to collect enough walk-forward data points and manually test the effects of earnings announcements on returns. But, this is a simple example of how a trading bias can manifest in trading your system much differently than your trading system's simulation.