Jared Broad Jared Broad is the founder and CEO of QuantConnect - a web based algorithm trading platform, combining a powerful cloud with 15 years free financial data. Clone open-sourced trading algorithms from the community and trade them on your own brokerage account. Sign up for free at QuantConnect.com

The Importance of Benchmarking

1 min read

There are two different techniques for measuring your strategy performance; relative and absolute performance. Before you design your strategy its important to define your metrics for success. As you iterate through strategy ideas this will help you know where you need to improve.

An absolute return strategy aims to make a consistent steady return independent of market conditions. It might rely on assets which are not affected by the market volatility such as bonds. Strategies which trade long and short are easier to be designed for an absolute return.

[wp_ad_camp_5]

 
The alternative method is to compare or “benchmark” your strategy a market index. The precise index or market representation you choose can vary but often funds choose the S&P500. With a relative return strategy reducing holdings to cash is a net gain relative to a downward market.

We’ve integrated this directly into the QuantConnect results panel so you can load a custom benchmark into your charts, to know how your strategy is performing relative to the major indices. To access it, click on the “Select Benchmark” menu in the Chart Options on the right hand side:
bench

To demonstrate the benchmarking functionality we’ve written the next video in the QuantConnect University series – Sell in May and Go Away. It is a demonstration for how to code up the sell in may strategy, and then we benchmark it to the S&P500 over the same period.

[js] document.write(“[div class=\”qc-embed-frame\” style=\”display: inline-block; position: relative; width: 100%; min-height: 100px; min-width: 300px;\”][div class=\”qc-embed-dummy\” style=\”padding-top: 56.25%;\”][/div][div class=\”qc-embed-element\” style=\”position: absolute; top: 0; bottom: 0; left: 0; right: 0;\”][iframe class=\”qc-embed-backtest\” height=\”100%\” width=\”100%\” style=\”border: 1px solid #ccc; padding: 0px; margin: 0px;\” src=\”https://www.quantconnect.com/terminal/cache/embedded_backtest_0c5a1693-121f-4212-8cff-7442227f4705.html\”][/iframe][/div][/div]”);
[/js] [youtube http://www.youtube.com/watch?v=25Wi3XgslBs?html5=0&controls=1&color=white&theme=light&modestbranding=1&showinfo=0&rel=0&suggestedQuality=hd1080&enablejsapi=1&origin=https%3A%2F%2Fwww.quantconnect.com]

With this particular implementation we achieved the same returns with lower volatility, resulting in and overall better than investment strategy.This post originally appeared on the QuantConnect Blog. QuantConnect is a free online back-testing solution, seeking to democratize finance and make algorithmic trading accessibly to all investors.

    Jared Broad Jared Broad is the founder and CEO of QuantConnect - a web based algorithm trading platform, combining a powerful cloud with 15 years free financial data. Clone open-sourced trading algorithms from the community and trade them on your own brokerage account. Sign up for free at QuantConnect.com

    [Research] Youtube Thumbnail Indicator Similarity to the Magazine Cover…

    Sentiment indicators often provide contrarian signals that can help traders and investors make informed decisions. One such innovative sentiment indicator is the YouTube Thumbnail...
    Rajandran R
    1 min read

    How Human Behavior Messes with Market Trends (And What…

    You’ve probably noticed that the markets don’t always act rationally. In fact, they often seem downright crazy! That’s where behavioral finance comes into play....
    Rajandran R
    2 min read

    Understanding Trading Risk Management with Edgewonk’s Math Cheat Sheet

    Risk management is a critical component of successful trading, and the Edgewonk's Math Cheat Sheet provides traders with a comprehensive guide to managing risks...
    Rajandran R
    2 min read

    Leave a Reply

    Get Notifications, Alerts on Market Updates, Trading Tools, Automation & More