I’m going to ask for some input from the blogosphere with this issue.
I am a firm believer that a simple system is more robust than a more complex system. This means that a simple system is less likely to be curve-fit and more likely to survive changing market regimes without a major breakdown.
What I’m am struggling with is touched on briefly in the previous post about a 4 Factor ETF System.
As I think more about factors, I think it may be important to make a distinction about the number of inputs required to derive the factor.
For example, if we use Rate of Change to rank ETFs, then we have one factor (Rank) with one input (n periods):
What if we instead use two differing ROCs, and weight them? That would look like this:
Rank=ROC(n periods*weight)+ROC(n periods*weight)
While “Rank” is still the single factor, we now have multiple inputs required to make this factor.
What I’m pondering is this: Are inputs equal to factors?