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I've noticed that some algorithms perform well on a backtest "Strategy Equity" metric but poorly in terms of Alpha Direction / Magnitude. Yet, others perform very well at predicting direction + magnitude, but fail to attain profit.
With a consistent magnitude + direction both close to 100 while emitting 5-10 Insights per day, why might a strategy fail to maintain positive P/L?
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Rahul Chowdhury
Hey Ryan,
High direction scores tend to signal an uneven distribution of predictions. The most likely situation that would produce a high direction score is a strategy that goes long on long term positions. This strategy works because over large enough periods of the time the market tends to rise. However, strategies like these generally do not outperform the market and so have low PSR. A direction score around 50 is more natural for good algorithms.
For more details, please check out the docs on Algorithm Scoring.
Best
Rahul
Ryan Bell
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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