Ranking and buy rules

Research
1

Hi,
I have already searched the forum for the below problem, but could not find a satisfactory answer:

Can somebody please explain me how the “buy rules”, the formula “rating” and “rank” works (in a simulation)?

I have two ranking methodologies: 1. Value, 2. Momentum

Scenario 1:
I choose “Value” as my main ranking methodology and type in two buy rules:
Buy1: Rank > 90
Buy2: Rating(“Momentum”) > 90

Sell Rule:
Sell1: Rank < 90

Scenario 2:
I choose “Momentum” as my main ranking methodology and type in two buy rules:
Buy1: Rank > 90
Buy2: Rating(“Value”) > 90

Sell Rule:
Sell1: Rating(“Value”) < 90

Now my understanding of the buy rules was that they have an implicit “AND” condition, therefore between scenario 1 and 2 there should be no difference in outcome (to make it comparable I also changed the sell rule so that it always references the “Value” ranking system. However, there is a vast difference in the outcome (18% versus 23% compounded annual return). The equity curves also look very different.

Could somebody explain to me why I come up with different equity curves, if I swap the main ranking system?

2

Stefan - your simulation will buy the number of stocks that you set with the parameter “Position Sizing”. If you enter 10% position size then 10 stocks will be bought. The stocks that are bought are determined by the ranking system i.e. the 10 highest ranked stocks. In the first scenario you would buy the top ranked “Value” stocks. In the second scenario you would buy the top ranked “Momentum” stocks. Of course the stocks must fulfill both buy rules… Rank>90 and Rating(" … ")>90.

Steve

3

Thank you Steve,

that makes sense.

best regards
Stefan