Greetings,
In the notebook you rank returns, RSI and STD.
Its clear with the returns: the higher the return the higher the ranking.
But what is the logics of ranking RSI and STD, as in is higher RSI better and is standard deviation better and or vice versa?
If higher RSI and STD are better then why is it so?
Many thanks in advance.
Alpha Generation
In this step, the 2-day returns, the 7-day standard deviation and 14-day RSI is computed and are ranked as below
1. The higher 2-day returns is given a higher rank assuming that the returns momentum will continue
2. The lower 7-day standard deviation is given a higher rank assuming that relatively less volatile cryptos are preferred
3. The higher 14-day RSI is given a higher rank assuming that the trend will persist
Hi Arltan,
In the notebook, we are using three factors to help us create a portfolio. They are 2-day returns (higher the better), 7-day standard deviation (lower the better), and 14-day RSI (higher the better).
If you look at the working of RSI, you understand that RSI is an indicator with values between 1 to 100. If the price is increasing, the RSI indicator will be higher. Here, the logic is that a higher RSI value means that the asset is positively trending and this trend will persist.
For example, IF BTC has an RSI value of 60 and ETH has an RSI value of 55, we are assuming that BTC has a stronger trend than ETH and thus BTC should be ranked higher as BTC might trend for longer.
Now standard deviation is used to calculate volatility and a lower standard deviation means that the asset is less volatile. If the asset has a lower standard deviation, it is assumed that it is less volatile. If it is less volatile, then you would not expect to see large swings in its prices. Thus, a lower standard deviation might be preferred as it is less risky. Thus, assets with lower standard deviation are ranked higher.
Hope this helps.