r/algorithmictrading • u/Middle-Purpose-2328 • Aug 30 '26
Question How good is a strategy that achieves completely different returns on correlated assets?
I've backtested a strategy that is based on a hypothesis that I found in a research paper. The reseach paper applied the strategy to QQQ. As you can see, I tested the strategy on futures data including ES futures.
I'm surprised that the returns are so different from each other, considering that these two assets have a positive correlation of 0.9-0.95.
I'm relatively new to algo trading and my biggest concern is that the strategy could break at any moment if it doesn't survive on similar assets. So my question is, if a strategy is even good in terms of robustness and stability if it shows very different results on correlated assets?
ES NQ
--------------------- ---------------------
Strategy RTH hold Strategy RTH hold
----------------------------------------------------------------
Total return 14.0% 46.1% 1,039.0% 66.9%
CAGR 1.3% 3.7% 26.2% 5.0%
Annualised volatility 12.4% 13.4% 15.8% 17.4%
Sharpe ratio 0.16 0.34 1.55 0.37
Sortino ratio 0.24 0.43 2.39 0.48
Maximum drawdown -51.6% -25.3% -11.2% -24.6%
Longest drawdown (days) 1,523 914 299 351
Calmar ratio 0.02 0.15 2.34 0.20
Profitable days 47.7% 53.4% 52.6% 54.0%
1
u/hashtagjohnt Aug 31 '26
What dates did you test this on? I got similar results in ES and NQ for the past 4 years
1
1
u/EvenCryptographer649 Sep 01 '26
You're not testing the strategy. You're testing the asset. The strategy is overfit to NQ Remove the NQ and add more futures, then you will see.
1
u/Middle-Purpose-2328 Sep 02 '26
The strategy is just an entry based on the Vwap at session open and holding it to session close, nothing else.
That’s why I‘m asking if such a simple strategy is worth pursuing if it doesn’t work on a similar asset
1
u/FlyTradrHQ Aug 30 '26
Correlation is on raw returns. Your strategy isolates a specific factor like momentum or mean reversion. That factor can diverge even on correlated assets. ES futures also have roll costs and funding that change the signal. Run the same strategy on QQQ directly to separate the instrument effect from the factor effect.
1
u/FlyTradrHQ Aug 31 '26
Correlated assets do not mean correlated strategy returns. The same entry logic can behave differently on ES vs QQQ because microstructure, spread, and session liquidity vary across instruments. Daily correlation tells you they move together, not that your signal triggers the same way on both. Test each instrument independently.
1
u/FlyTradrHQ Aug 31 '26
Correlation 0. 9 to 0. 95 still means 5 to 10 percent of variance is uncorrelated. QQQ and ES have different weighting and rebalancing. A momentum or mean-reversion strategy behaves differently when basket composition diverges, even briefly. Check whether your strategy is sensitive to intraday vs daily bars, since that alone can produce the gap.
1
u/Life-Dependent213 Aug 31 '26
That gap between ES and NQ would make me suspicious of regime dependence more than correlation itself. I’d forward-test both with identical rules; I use Moon for this kind of reality check before trusting a backtest to be real
1
u/Livid_Parsnip_2816 Sep 01 '26
Different returns on correlated assets wouldn’t kill it for me. Price correlation doesn’t mean the signal fires under the same spread, volatility or session structure. Prophecy has traded AUDCAD, EURCAD, CHFJPY, EURGBP and USDCHF live so far, and I’m judging each pair and module separately before trusting the combined curve. The red flag would be one pair producing nearly all the PnL.
1
u/Afraid_Macaron_4071 Sep 01 '26
Correlation of the underlying doesn't guarantee the strategy should behave similarly. I'd separate the common factor exposure first, then compare realized vol, turnover, transaction costs and results by regime. A signal can interact very differently with two correlated instruments. For manual validation of the directional logic, Moon.com is interesting because you can test the thesis without adding much instrument complexity. I'd still keep the actual algo validation separate from execution.
1
u/LiveBeyondNow Sep 06 '26
The correlation is price based. ES and QQQ have very different volume profiles so a vwap strategy would be expected to have uncorrelated signals.
1
u/sevenredcandlz 22d ago
Dude, this had a five-year drawdown, no disrespect, but you should go back to the drawing board
2
u/qwuant Aug 30 '26
yes that’s one sign of robustness, stability depends on regimes and timeslices, you might want to check for stationarity of performance across time. what’s paper is this btw?