The Algorithmic Advantage 037 - Kevin Davey II - Selecting Optimal Strategies for Peak Performance
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Apr 24, 2025 Kevin Davey, a systematic trader with expertise in quantitative testing and strategy design, dives into trading frameworks for consistency and longevity. He emphasizes the importance of walk forward analysis and its role in refining strategies while avoiding overfitting. The discussion highlights risk management, psychological preparedness, and technology's impact on portfolio construction. Davey shares personal insights, including the necessity of tenacity and continuous learning, making a case for diversified algorithmic trading over discretionary methods.
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Diversification reduces risk exponentially
- Adding more strategies greatly reduces risk initially but yields diminishing returns after 20-30 strategies.
- There is an exponential decline in risk with diversification up to a point, then benefits plateau.
Learning walk forward from Bob Pardo
- Kevin Davey shares how reading Bob Pardo's book on walk forward testing revealed flaws in his approach.
- Despite past success, he adopted new walk forward methods improving his systematic testing.
Do One-Pass Walk Forward Testing
- Perform walk forward testing only once to avoid over-optimization and data leakage.
- Avoid relying on tools that select the "best" parameters by validating on the same data, which falsely inflates results.
