Previously, we ran Strategy 9 with Dynamic Universe Selection for crypto. Results were a bit underwhelming. You could argue that given crypto’s negative utility, their long-term returns should tend to zero and trend-following is not magic that can turn a basket of -EV assets into a stable return stream.
Here, we put MSCI country equity indices through the same strategy. On the face of it, a Binary Long-only strategy has a higher Sharpe than buy & hold.
However, it’s drawdown doesn’t make it leverage friendly. So, you end up trailing buy & hold returns. The bigger problem is that when you look at yearly returns, it appears that something stopped working in 2009.
Previously, we ran Carver’s Strategy 9 with Crypto listed before 2019. However, there was a ton of new coins listed in the early 2020’s and incorporating them in the backtest meant taking a walk-forward approach to universe selection.
Here’s what we did: at the end of every month, we looked at all coins that had at least 500 days of history and had a positive Sharpe Ratio when Strategy 9 was applied to it. We then applied Strategy 9 on those coins for the following month. The technical details can be found here.
The results were underwhelming, to say the least.
There is some literature on using the Hurst Exponent to filter for trending instruments, so we tried that out as well. However, using Hurst didn’t really make a big difference.
When we ran Carver’s Strategy 9 with 15 Instruments, we noticed how most of the returns were driven by crypto. However, that had only the three big coins – BTC, ETF and SOL. Since hand selecting instruments to trend-follow is also a form of overfitting, we expanded the universe to include all x-USDT coins listed in Binance since before the year 2019. There are 21 of those.
Once you expand the universe, the sheen wears off.
While the highest returns came from using a Binary Long-Only Equal-weight strategy, it came with a 60% drawdown, ruling out leverage.
Digging into the coin-level metrics, we see how a fair number of coins have negative contributions.
While the Big 3 coins had favorable trend-following returns, expanding the universe did not yield a better portfolio.
Our previous post on Rob Carver’s Strategy 9 experimented with four major Indian indices. We saw that only two of them contributed to out-performance while the others dragged.
Can we just run those that worked and throw away the rest?
The whole point of using multiple moving averages is to avoid overfitting. Hand selecting instruments to trend-follow is also a form of overfitting. Carver repeatedly says that his approach works best on a large set of instruments (start with 100 and whittle down.) However, as an Indian retail trader, we do not have many options. Realistically, we can lay our hands on at most 15 different instruments.
With these 15, we played around with: scaled vs. binary x long-only vs. long-short x equal-weighted vs. inverse volatility weighted.
The results are sobering.
Long-only Equal-weight
Long-short Equal-weight
Long-only Inverse-volatility-weighting
Long-short Inverse-volatility-weighting
Of these, only the scaled long-only equal-weight setup looks promising. However, if you look at how individual instruments performed, it is hard to remain unbiased.
In Rob Carver’s Advanced Futures Trading Strategies (Amazon,) there’s a chapter, “Strategy Nine: Multiple Trend Following Rules,” that uses composite trend-following rules to drive a long-short strategy. We explore the strategy through an Indian market participant’s lens.
There are a number of decision points to navigate. Primarily, long-only vs. long-short, binary vs. scaled and equal-weight vs. cost-screen. Some of these are not practical for retail futures traders. For example, you could use the different SMA rules to scale in and out of positions instead of taking a binary approach. However, that implies that each position will need at least a dozen contracts – a capital requirement that is out of reach of a typical retail trader. Another problem is that the Indian market is notoriously expensive to trade. The cost-screen used by Carver throws out a lot of short-term SMAs, making the strategy unresponsive to short-term market moves.
Summarizing NIFTY 50, NIFTY BANK, NIFTY MIDCAP and SMALLCAP indices through Strategy 9:
NIFTY 50 and NIFTY BANK are poor candidates for this system – consistently under-performing buy & hold. The SMALLCAP index doesn’t have futures listed on it – forcing a realistic implementation to be long-only. The MIDCAP index does have futures on it, making long-short possible. The cost-screen version can be safely ignored.
If we decide to use futures for MIDCAP, we need to make sure we don’t blow up because of leverage. The problem with the long-short strategy is the periodic 20% drawdowns. Even at 2x leverage, that’s a capital impairment of over 40%.
However, looking at the equity curve, it may be worth the extra antacid budget?
The next question is, scaled vs. binary?
The scaled long-short version (red line in the chart above) is objectively worse than binary long-short (green line).
So, the version that worked for MIDCAPs is a binary long-short without cost-screen.
For SMALLCAP, given that it doesn’t have listed futures, we’ll have to settle for the binary long-only version without cost-screen.
We interrogated Claude as to the robustness of Carver’s approach. You can read the back-and-forth here.
