Hi all, I tried some extremely simple and naive momentum strategies (if today > yesterday then go long today; if today < yesterday is down then go short today; the position size is always one unit; doesn't change direction until facing the opposite; always in the market, i.e. the position sizes are either +1 or -1...) on some very illiquid assets... It has a great Sharpe before transaction costs, but then when I apply transaction costs, I got a negative Sharpe of -9.0... What could be good momentum strategies for illiquid assets? Could anybody please shed some lights to me? Thanks a lot!
Are you specifically attempting to exploit the fact that an instrument is illiquid? If so, I can't help you there, as I do not trade in illiquid instruments, I specifically avoid them. Also, by transaction costs, are you only implying commissions, or have you also accounted for wide bid ask spreads and slippage? If not, your results will likely become even worse. Recently I responded to another thread which asked when it was appropriate to bid at the midpoint between wide bid ask spreads, I basically responded by saying it is never appropriate, just trade something else. The same applies here, why put up with illiquidity at all, let alone on purpose? There is always another instrument to trade, in fact, thousands of them.
Look, the problem is time frame. Not that I'm suggesting something that basic would work on any time frame, but try it on multiple instruments on a walk forward basis, (at the same time,on a weekly chart or larger-get diversified or die) and see what happens. Momentum strategies, and that is what you have? Are you factoring in longer term "momentum", or no? Kind of important, to an extent.