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Market Pulse: Why a ”better” signal can yield worse returns

Posted by Erik Martin Hansén

On Fridays, Market Pulse focuses on rule-based strategies. We use systematic models based on data, objective signals and risk diversification.

That is exactly the paradox we are going to solve today. We buy stocks on dips in a positive trend, and we have tested it with two different signals, TTR, which we use today, and a new signal based on Bollinger Band, which will be included in the platform in the next version. The Bollinger Band signal works well, high accuracy, more winning trades. And yet it gives a lower CAGR than TTR. Why?

That's today's lesson, and it says something important about how you should think about signals in general, not just this one.

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Posted by Erik Martin Hansén
After studying at Uppsala University, Erik Hansén has worked in the financial industry since 2007 at several brokerage firms and traded privately. In his role as an analyst, Erik has written highly regarded market letters.

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