Topic
Why is trend score calculated this way?
mozartman asked · 09/14/2014
- #1
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(submitted question too early, here is the explanation...)mozartman · 09/14/2014 22:00:42
If I understand correctly, the trend score used by your TAA strategies is an average of the 1, 4, 13, 26, and 52 week returns. I am just curious, how was this determined to be the optimal strategy for determining asset class momentum? Did you do a side by side comparison of various different momentum averaging strategies to determine the optimal one? Has there been other research supporting this strategy?
As always, thank you for the excellent service!
- #2
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Hi, the scoring formula is close to what you described. We have done several internal studies in terms of momentum scoring methods. There are those that are as simple as simple or exponential moving averages (SMAs or EMAs) and others that use more sophisticated methods. In general, what we found is that all of these methods tend to behave similarly but they can still vary quite differently in a given period, especially in a period where trends are not as clear as they should be. The method we have has compared favorably in general but not definitely for all portfolios or all periods. Notice our method is similar to EMAs as it tends to put more weights into the latest returns.Admin · 09/15/2014 14:41:32
The important thing is that all of the methods will be able to capture a mega trend such as the US stocks' up trend in the last 3 years. In a short term, things can fluctuate differently and that is why more diversified holdings help (though they will hurt long term performance a little bit). The other important factor is the length of the trend we try to capture: in general, our trend is for intermediate to long term, not a short term trend.
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