You’ve created your library of columns for every backtest you run, but what columns should you include?
The good news is that the Strategy Cruncher (coming soon, get notified here) can examine all of them and show you which ones are most predictive for your strategy and show you the optimal way to make it more profitable.
Even though it can look across all your columns, you still want to focus on creating columns that have the best chance of being predictive.
Some columns in my library get identified by the Strategy Cruncher over and over as predictive across many strategies, while others never appear.
What are the qualities of the columns that repeatedly show up as predictive?
They’re normalized. What does that mean? Here’s an example to illustrate.
Take two stocks, META and DOCS. META is currently trading over $600 per share. DOCS is trading at just above $50.
One column you might want to add to your backtest is Change from the Previous Close.
Think about the value of that column across both META and DOCS.
For example, let’s say the change from the close is $10 for both.
A $10 move in META is barely a drop in the bucket. But for DOCS, that same $10 move is significant.
Because the value for change from the close varies across different stocks, it’s better to come up with a value that’s more “normalized.”
That is, a value that more equally describes the significance across stocks with different prices.
Your thought might be to use a percent for the move, and yes, that’s better than dollars, but it still misses the mark since stocks’ movements vary even in percentage terms.
A better data point to use is to normalize it by Average True Range (ATR). ATR describes the normal amount a stock moves.
Incorporating ATR allows you to add a column that gives you an apples-to-apples comparison across all stocks.
Something like this is the kind of column you want in your library:
Change from the Close / ATR
(And ATR itself should be a separate column as well.)
Tomorrow, I’ll show an example that demonstrates why normalizing your columns is so important (but only if you want to maximize the amount of money you make from your strategy).
-Dave
P.S. Vacation Reminder: This coming Monday is Memorial Day, so the market is closed. This is your reminder to plan something fun so you don’t come in Monday morning and wonder what’s wrong with your trading platform. (I speak from experience, as you can probably tell!)
