A new Strategy Cruncher user, Dave P, asked this excellent question about whether to combine long and short versions of a strategy for optimizing or to keep them separate (posting with permission):
Dave P:
Thinking ahead to other mean reversion strategies that I am running, I wanted to get your input on how to approach Strategy Cruncher for long/short strategies. Do you recommend running both sets of trades (long & short) through Strategy Cruncher at the same time? Or, do you recommend splitting into separate trade lists (long only, short only) prior to running through the Cruncher?
First off, I love how Dave has taken one idea and created two strategies from it.
It’s not always the case, but when you find edge in one direction (long), you can often find edge in the opposite direction as well.
It is usually not a simple flip of the strategy – usually, there are some tweaks to be done in either direction.
For that reason, my default approach is to treat them separately – as two distinct strategies.
I’ll run each of them through the Cruncher separately to optimize them.
There is a situation where I’ll combine them, though.
If there’s a situation where the strategy is already low on trades – that is, the sample of trades is low enough that I feel like I can’t get much confidence in the data.
I have had situations where that’s the case, and I’ll combine long and short into the same set in order to create a larger set of trades that I feel better about drawing conclusions from.
Combining them works best in strategies where both directions are more equivalent.
I’ll also add columns that work in both directions.
For example, instead of just a column for Gap Percent, I’ll add a column for the absolute value of Gap Percent.
Optimizing on Gap Percent across long and short strategies doesn’t make sense, but the absolute value of Gap Percent is absolutely valid and likely to be identified as predictive.
See this post from several weeks ago where I show a more detailed example:
How To Make Your Strategy More Predictive
Great question, Dave P., and thanks for sharing it with the list!
-Dave
