Battleship III - Tearing down the Dreadnaught

Hello There,

I promised you a discussion of my thoughts about this strategy, and here we are.

Issue #1 - Volatility

The 15 day cumulative Returns checks are rough when you're holding Natural Gas. Lets say you're holding $KOLD, and it swings 10% down in a day off some bullshit news. You’re stuck in that position until the cumulative return of something else (usually BOIL) Eclipses the last 60 trading days of returns. Now this is great for catching protracted, grindy trends up but painful for sharp non-technical moves. Theoretically, it averages out to being positive according to testing so far, but this makes for absolutely gut-wrenching drawdowns some times.

Issue #2 - Reliance on one ticker/pair

A nifty little experiment I ran was looking at where the strategy gets its “Sick Gainz” from. Turns out that when you remove the 3x Leveraged Natural Gas ETF’s (KOLD and BOIL), the 3 Year backtest loses about 15% of its gains, but the max drawdown goes down by a very similar amount. If I was to run this strategy personally it would likely be without KOLD and BOIL, or at least drop the maximum position sizing down from 40%.

Bonus Gripe - It goes really wide.

There is a ton of redundancy in this strategy. There is a decent chance that if a 3x leveraged ETF is going on a tear, you’ll end up with 40% of your allocation being in that one ETF. This can be a really good thing in terms of strategy building, but it just doesn’t fit my personal risk tolerances, so I would much rather see the massive sort functions with upwards of 30 tickers broken into groups according to what they’re holding. All the commodities together, all the indexes together, the market region ETF’s, so on and so forth.

You know who sucks the most?

People who complain without offering solutions. So, here’s my solution, because I don’t suck.

Couple big changes, couple tiny ones.

Rapid fire small changes -

1. Evened out the odd numbered look back periods to minimize possibly of over fitness.

2. Adjusted trade threshold from 6% to 5%

3. Split KOLD and BOIL off into their own section to give exposure but cut it from a frequent maximum of 40% to a theoretical max of ~30%.

4. Re-weighted the sections against each other.

Now for the big one. I split the MASSIVE selection basket in the 3rd section into 6 smaller ones. Why? Simple, it limits the effect of the 3x leveraged assets to reach 40%+ allocations thus MASSIVELY decreasing overall volatility. Like I said, I don’t have the stomach for a 20% intraday swing and I’m willing to sacrifice gains to avoid those situations. Lets take a look at the results!

Well, there are some that would be disheartened by the above images. But me? A 15% reduction in Standard Deviation, a lower Maximum Drawdown than SPY, all while keeping the Sharpe above 2 counts as a win in my book!

Now we run it live and check back in a year!

Thats all for this weeks edition, let me know what you think of the new strategy over in the Discord Server!

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