Now that the new screener is up and running, and people are exploring the performance of their favorite screens, I want to pass along a hint or two about developing screens that test well.Â Â There will likely be a follow up post, or two, to this one so if anyone wants to comment or otherwise share some of their expertise please do so.
First and foremost, focus on the group of funds you start with.Â Most of us want to begin with all funds and let our filter rules and our sorting rules determine the best from the rest.Â That’s asking a lot from our simple rules, especially if we include a number of overlapping, highly correlated, funds.Â Â So the first suggestion is to narrow your list down to the basics and let each fund represent it’s sector of the market solely.Â Â
If you look at the groups of funds in the Sector Strategy and the International Single Country Strategy, you will see funds with generally lower correlations.Â Â Yes, the Russell funds have high correlations and a few of the European countries are a bit high, but most are in the .70 to .90 range (Corr. for Sector Strategy / Corr. for Int’l Strategy).
Let’s look at some simple examples by beginning with a basic model.Â We’ll filter for [Price] > [SMA-200] and order by [RSf].Â We’ll hold 5 positions and rebalance every 21 market days,
or about monthly. Â First lets look at all traditional funds (non-inverse and non-leveraged). Â Â You can see from the graph on your left (or here) that the performance has been unimpressive, having a CAGR of 2.5% and an Ulcer Index of 30.6.Â A taste of that 50% drawdown and you’ll have heartburn for sure.
Now lets take those same rules applied to a portfolio of funds created by combining both the Sector and International Strategies.Â Shown belowÂ is the result of this model.
The CAGR has improved to 12.1% and the Ulcer Index has dropped to 16.0%. The drawdown is still a little steep at 30% or so, but much better than 50% and we have no bond funds in thisÂ portfolio.Â Remember both of these backtests use the same screening rules.
So hint one is to start with a pre-selected group of funds.Â If you don’t want to create your own, Ameritrade did a pretty good job with their list of commission free funds.Â Â The same backtest applied to that list is here, it returned 16.3% with an Ulcer index of 10.7 and a 20% max. drawdown.Â Of course, in all of this we have to remember that backtests aren’t perfect and the future will always be different from the past.
Hint 2 is a quick one.Â Â Do not mix leveraged funds in a backtest with non-leveraged funds because they are different animals.Â Leveraged funds are much faster acting and therefore timing signals must be tuned accordingly.
Hint 3 is similar.Â Use short funds cautiously in a backtest involving long funds.Â Most every trader will tell you how bear markets behave differently from bull markets, and they are right.Â The market generally falls much faster than it goes up, so again a system tuned to bull markets will generally not perform so well in bear markets.
I’ll leave testing these final two hints to you, they’re easy enough. Â To wrap up, you will see some new links showing up on the left panel of the screener pages that will show you your recent activity.Â Â This should make it easier to go back to a screen you ran a few minutes earlier.Â If you see a way to improve it let us know.
If there are no major problems the next few days, this new screener will likely replace the old one sometime this weekend.