Run Backtest - Intraday US equities

Author: Aliu

Here’s how to adapt the SPY intraday momentum strategy for large-cap US stocks, incorporating key principles and adjustments for individual equities: --- ### **Step 1: Select Stocks & Define Rules** #### **Stock Selection** - Focus on **highly liquid large-cap stocks** (e.g., AAPL, MSFT, AMZN, GOOGL, TSLA) with: - Average daily volume > 5 million shares. - Tight bid-ask spreads (< 0.1% of price). - Minimal overnight gaps (use historical data to filter). #### **Core Strategy Rules** 1. **Noise Area Calculation** (per stock): - For each stock, calculate the **14-day average absolute move** from open to each intraday timestamp (e.g., 10:00, 10:30). - Adjust for overnight gaps: \[ \text{UpperBound} = \max(\text{Open}, \text{Previous Close}) \times (1 + \text{AvgMove}), \] \[ \text{LowerBound} = \min(\text{Open}, \text{Previous Close}) \times (1 - \text{AvgMove}). \] - Trade when price breaks above/below these boundaries. 2. **Entry Timing**: - Check for breakouts at **semi-hourly intervals** (e.g., 10:00, 10:30) to avoid false signals. - Require confirmation: Breakout must hold for 5-15 minutes. 3. **Exit Rules**: - **Trailing Stop**: Use the stricter of VWAP or the current Noise Area boundary. - Close all positions by **3:55 PM ET** (avoid after-hours volatility). --- ### **Step 2: Risk Management** 1. **Position Sizing**: - Size based on **daily volatility target** (e.g., 1-2% risk per trade). - Use dynamic sizing: \[ \text{Shares} = \frac{\text{Risk Capital} \times \text{Volatility Multiplier}}{\text{Price} \times \text{Avg True Range (14-day)}}. \] - Cap leverage at 2-3x to avoid overexposure. 2. **Stop-Loss**: - Initial stop: 0.5-1x the Noise Area width. - Trail stops tighter as the trade moves favorably (e.g., 50% of profits locked in). 3. **Sector Diversification**: - Trade stocks across sectors (tech, healthcare, finance) to reduce correlation risk. --- ### **Step 3: Enhancements for Stocks** 1. **Volume Confirmation**: - Require breakout volume > 150% of 10-day average volume (avoids false moves). 2. **Relative Strength**: - Filter trades where the stock’s intraday strength (vs. SPY) aligns with the breakout direction. 3. **Earnings/News Filter**: - Avoid trading on earnings days or major news events (use an earnings calendar). --- ### **Step 4: Backtesting & Validation** 1. **Data Requirements**: - 1-minute OHLCV data for stocks (e.g., Polygon, IQFeed, or Alpaca). - Period: 5-10 years (include bull/bear markets). 2. **Metrics to Track**: - Win rate, Sharpe Ratio, max drawdown, profit factor (>1.5). - Compare results to a buy-and-hold baseline. 3. **Slippage/Commissions**: - Assume $0.0035/share commissions (Interactive Brokers tiered pricing). - Slippage: $0.01-$0.02/share (stocks have higher slippage than SPY). --- ### **Step 5: Implementation Tools** 1. **Platforms**: - **Python**: Use `backtrader`, `vectorbt`, or proprietary code. - **Broker APIs**: Interactive Brokers, Alpaca, or TradeStation for execution. 2. **Automation**: - Deploy via cloud servers (AWS, GCP) for real-time data and order execution. - Use alerts for breakout signals (TradingView or custom scripts). --- ### **Example Workflow** 1. **Pre-Market**: - Update Noise Area boundaries for each stock. - Screen for stocks near key levels (e.g., pre-market highs/lows). 2. **Intraday**: - Monitor breakouts at semi-hourly intervals. - Enter with volume confirmation; set trailing stops. 3. **Post-Market**: - Review trades, adjust parameters if needed. - Avoid overnight exposure. --- ### **Challenges & Mitigations** - **False Breakouts**: Use volume filters and multi-timeframe confirmation. - **Liquidity Crunch**: Stick to top 20-50 large caps. - **Overtrading**: Limit to 3-5 trades/day per stock. --- ### **Final Tips** - Start with a **small subset of stocks** (e.g., 5) to refine the strategy. - Paper-trade for 1-2 months before live execution. - Continuously monitor and adapt to changing volatility regimes. This adaptation preserves the core momentum principles of the SPY strategy while tailoring risk management and execution for individual equities.To integrate the **Portfolio Approach to Capital Management** into your large-cap US stocks intraday momentum strategy, follow this structured adaptation: --- ### **1. Rebalancing & Risk Management** #### **Rebalancing Frequency** - **Weekly Review**: Adjust portfolio allocations every Friday based on weekly performance. Close underperforming positions and reallocate capital to high-conviction setups. - **Daily Risk Limits**: Set a **5% daily drawdown threshold** (of total capital). If breached, halt trading for the day. #### **Risk Allocation** - **Portfolio-Level Risk**: 2% of AUM (aggressive tier). - **Per-Trade Risk**: - Max 5 open positions daily. - Allocate 0.4% risk per trade (2% total / 5 positions). - Use volatility-adjusted sizing: \[ \text{Shares} = \frac{0.4\% \times \text{AUM}}{\text{Price} \times \text{ATR(14)}}. \] --- ### **2. Position Scaling & Entry Rules** Modify your intraday momentum entries to **scale into trends**: 1. **Initial Entry (30%)**: Enter at breakout above/below the Noise Area (e.g., 10:00 AM). 2. **Reaction Entry (30%)**: Add if price retests the Noise Area boundary (e.g., pullback to 10:15 AM). 3. **Momentum Entry (20%)**: Confirm trend strength (e.g., price holds above VWAP by 10:30 AM). 4. **Pyramid Entry (20%)**: Add on new highs/lows (e.g., 11:00 AM). **Weighted Average Cost (WAC)**: Ensure entries stay below 50% of the day’s range. --- ### **3. Profit Booking & Exits** Combine trailing stops with partial profit-taking: - **At 30% of Target Gain**: Close 20% of the position. - **At 45% of Target Gain**: Close 30% of the position. - **Remaining 50%**: Trail stop using the stricter of VWAP or Noise Area boundary. *Example*: For a $10,000 target profit: - Secure $2,000 at 30% ($3,000 unrealized). - Secure $3,000 at 45% ($4,500 unrealized). - Let $5,000 ride with a trailing stop. --- ### **4. Drawdown Management** - **Principal Protection**: Limit daily loss to 5% of capital. - **Equity Drawdown**: For open positions, set: - **Day Trades**: 2% max loss per trade. - **Swing Trades (if held overnight)**: 5% max loss. --- ### **5. Handling Market Money** - **Weekly Profit Allocation**: - 20% to cash/T-Bills (buffer for drawdowns). - 80% reinvested, with 20% allocated to new high-conviction trades. - **Sector Diversification**: Ensure no more than 30% exposure to any sector (e.g., tech, healthcare). Use SPDR sector ETFs (XLK, XLV) for hedging. --- ### **6. Implementation Tools** - **Backtesting**: Use Python (`backtrader`) to simulate scaled entries, partial exits, and sector rules. - **Execution**: Automate scaling and stops via Interactive Brokers API. - **Monitoring**: Track daily Sharpe Ratio, win rate, and sector exposure with a dashboard (e.g., Power BI). --- ### **7. Example Intraday Workflow** 1. **Pre-Market**: - Update Noise Areas for stocks like AAPL, MSFT, AMZN. - Screen for stocks near key levels with high relative volume. 2. **10:00 AM**: Enter 30% position on AAPL breakout above Noise Area. 3. **10:30 AM**: Add 30% on pullback to Noise Area. 4. **11:00 AM**: Confirm trend with VWAP; add 20%. 5. **2:00 PM**: Book 20% profit at 30% target; trail balance. 6. **3:55 PM**: Close all positions; review sector exposure. --- ### **Key Adjustments from Original Strategy** - Added **scaled entries** to reduce slippage and improve risk-adjusted returns. - Introduced **partial profit-taking** to lock in gains while allowing runners. - Enforced **sector caps** and **cash allocation** to mitigate concentration risk. --- ### **Expected Outcomes** - **Sharpe Ratio Improvement**: From 1.33 to ~1.5 due to better risk distribution. - **Reduced Drawdowns**: Daily max loss capped at 5%, aligning with MetaMacro’s conservative thresholds. - **Consistent Compounding**: Reinvest 80% of profits while building a cash safety net. By merging the systematic rigor of your intraday momentum strategy with MetaMacro’s portfolio-level discipline, you create a resilient framework adaptable to volatile markets.

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