Monthly Sector Rotation Part 2

I posted a sector rotation system a couple of days ago. In this post I would like to check the parameter stability of the system just to see if the performance was due to “luck”.

 

From the above, I did a 3d optimization in Amibroker. I varied the top held rank and the cut of off rank from 1 to 9 to see visually the parameter performance of each combination. As you can see, anything to the left of the red lines are better. When we hold more than top 5 positions, we will no longer get the advantages of better performance through investing in high momentum sectors. On the other hand, if our entry and exit were the same (ie enter top 5 rank; exit when fund drops below top 5), there are going to be whipsaws as funds may change rank monthly. Therefore it smoothly return when they are different.

In a later post, I hope to display parameter consistency through displaying rolling performance metrics for this model. I believe that its pointless if we just use the above optimization technique to choose the parameter to trade. Rather I think its better to find a parameter set which offers consistency in return.

SE

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