One Size Does Not Fit All
In our eternal search for the trading Holy Grail it is often tempting to try and find the “ultimate” signal (indicator) and apply it to as many instruments we can. This single solution approach for the most part fails miserably, think of a carpenter with only a hammer in his (or her; QF is an advocate for equal opportunity) toolbox. While making signals adaptive is definitely an improvement however, I think we sometimes miss the point.
Instead of harassing and optimizing a signal ad absurdum to improve the backtest, one would be better served by looking at the big picture. One signal in itself only contains so much information. While there are a lot of good indicators that perform very well by themselves available (the blogosphere is a really rich ecosystem in that regard); their power is only magnified when combined with other signals containing different information. The secret is in the signal aggregation. In other words, in how we form and use an ensemble of signals isolating different pieces of information to build a profitable strategy (note the use of the word strategy as opposed to system, careful wordsmithing aside, the difference is paramount). This is a topic I have been taking a close look at recently and I think the blogosphere is a perfect tribune to share some of my findings. As a starter, here are some points I will be touching on in the upcoming series of post.
1. What are the basic intuitions behind ensembles and why can they help in building trading strategies?
2. How do we isolate and quantify specific pieces of information and then observe their effect on the instruments we trade.
3. How to we evaluate current pertinence of the signals.
4. Finally, how do we aggregate all the useful information and build a strategy from the ground up.
The mechanics are going to be explained using a simplified example for readers to follow along but the intuition will be the same that the one behind the first QF strategy to be tracked real-time on the blog. I still don’t have a fancy name for it but it’ll get one for its official launch.