Basic ETF Constituents in Uptrend Strategy Beats Reference ETF Hands-Down?

To address Kal's concerns about the strategy's performance and potential biases, let's break down the findings and suggestions:

Documentation Insights

1. ETF Constituents Universes: The ETF constituents universe allows you to select securities within an ETF, such as SPY. This can be useful for creating a universe of securities that meet specific criteria, like trading above a certain SMA.

2. Price Above SMA Strategy: This strategy selects securities that are trading above their SMA, indicating an uptrend. The change from a 200-day to a 50-day SMA can make the strategy more sensitive to recent price movements, potentially increasing turnover and responsiveness to market changes.

3. Rebalance Daily: Daily rebalancing can lead to higher transaction costs and turnover, but if fees are accounted for, it should not artificially inflate returns. However, it can make the strategy more responsive to short-term market movements.

4. Bias in Backtesting: Common biases include look-ahead bias, survivorship bias, and overfitting. Ensuring data quality and testing across different time periods can help mitigate these biases.

5. 50-Day SMA vs. 200-Day SMA: The 50-day SMA is more sensitive to recent price changes, which can lead to more frequent trading signals compared to the 200-day SMA, which is smoother and less responsive to short-term fluctuations.

Suggestions for Kal

1. Review Strategy Logic: Ensure the logic aligns with your intended strategy, especially with the use of a 50-day SMA and daily rebalancing.
2. Test for Overfitting: Run the strategy on different datasets and time periods to check for consistent performance.
3. Evaluate Transaction Costs: Double-check that all transaction costs are accurately modeled in the backtest.
4. Assess Market Conditions: Analyze the market conditions during the backtest period to understand if the performance is due to favorable conditions.
5. Conduct Sensitivity Analysis: Vary key parameters like the SMA period and rebalance frequency to understand their impact on performance.
6. Compare with Benchmarks: Compare the strategy's performance against relevant benchmarks to contextualize the results.

By following these steps, Kal can gain a deeper understanding of the strategy's performance and identify any potential biases or issues.

Sources: Futures Fast Trend Following, with Trend Strength, Research Guide - QuantConnect.com, Head & Shoulders TA Pattern Detection, Seasonality Effect Based On Same Calendar Month Returns, Momentum In Mutual Fund Returns