Why Most Trading Strategies are Fake

Описание: There is an extremely high false discovery rate in both the academic and financial industry for trading strategies that “produce” alpha. In fact, most of these strategies are false discoveries due to research bias, multiple testing and the true probability of finding a new investment strategy being very low (less than 1%) due to competition.

As stated by Marcos Lopez de Prado with a true probability of a backtested strategy being profitable at 1%, and 80% power (rate of identifying true strategies), in testing 1000 trading strategies using a standard threshold of significance level at 5% would imply at least 86% false discoveries!

Today we investigate issues of multiple testing and false discovery of a profitable trading strategy. We develop a momentum-based trading strategy on Apple stock and show the issues that can arise from unknowingly completing multiple testing on the same dataset.

Papers discussed in this video
Evaluating Trading Strategies: https://www.stat.berkeley.edu/~aldous...
The Pitfalls of Econometric Analysis (Marcos Lopez de Prado): https://www.quantresearch.org/Lecture...
Scientific method: Statistical errors: https://www.nature.com/articles/506150a
Moving to a World Beyond “p less than 0.05”: https://www.tandfonline.com/doi/pdf/1...
An investigation of the false discovery rate and the misinterpretation of p-values: https://royalsocietypublishing.org/do...

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