Rolling Sharpe Thresholds for Buying Weakness and Managing Exits

Summary

This strategy calculates annualized Sharpe ratios from rolling excess returns, subtracting a per-period risk-free rate derived from the US three-month Treasury bill yield. It opens a long position when the ratio falls below a configurable low threshold, then closes on a high-threshold crossing or after a maximum number of bars. A state flag prevents another entry until the high threshold is reached. The script allows logarithmic or simple returns and adjusts annualization for daily, weekly, and monthly charts.

The accompanying rationale interprets weak risk-adjusted performance as possible institutional selling pressure and a low-price entry opportunity, with improving Sharpe as a possible signal that pressure has eased. It cites research on asset fire sales and fund behavior, but provides no strategy performance results or tests establishing that the thresholds predict reversals. Thresholds are fixed inputs, and the trading logic is long-only. Suggested extensions include downside-risk measures, drawdown filters, tail-risk constraints, and adaptive thresholds; the signal should therefore be treated as a hypothesis requiring validation across assets and settings.

Key ideas

• The strategy buys when rolling Sharpe falls below a chosen lower threshold.
• It exits when Sharpe rises above an upper threshold or the holding period expires.
• Excess returns are adjusted using a short-term Treasury yield and annualized by chart timeframe.
• A re-entry flag remains disabled until the upper Sharpe threshold is reached.
• The proposed institutional-selling explanation is an interpretation, not demonstrated strategy evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.