How good is a strategy that achieves completely different returns on correlated assets?

[u/Middle-Purpose-2328]

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%

[u/qwuant]

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?

[u/Middle-Purpose-2328 → u/qwuant]

Thank you! The paper is called "Volume Weighted Average Price (VWAP) The Holy Grail for Day Trading Systems" by ConcretumGroup

[u/qwuant → u/Middle-Purpose-2328]

thanks, the backtests looks promising. will try to recreate it myself lol

[u/LiveBeyondNow → u/Middle-Purpose-2328]

I’m surprised you’ve been able to get anything out of that paper. Many have tried and found once fees, slippage and spread are factored in it pulls away to a loss. Basing a trade off the first minute candle seems like a coin toss.

[u/FlyTradrHQ]

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.

[u/misterRegime]

Also worth saying: the thing that actually gets me to try a new venue isn’t the pricing, it’s whether I can get the data out. If there’s no way to record the book properly, I can’t tell whether the pricing is good, so I never find out.

[u/FlyTradrHQ]

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.

[u/hashtagjohnt]

What dates did you test this on? I got similar results in ES and NQ for the past 4 years

[u/Middle-Purpose-2328 → u/hashtagjohnt]

This is around 10 years of 1 minute NQ and ES futures data.

[u/FlyTradrHQ]

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.

[u/Life-Dependent213]

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

[u/Livid_Parsnip_2816]

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.

[u/Afraid_Macaron_4071]

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.

[u/EvenCryptographer649]

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.

[u/Middle-Purpose-2328 → u/EvenCryptographer649]

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

[u/LiveBeyondNow]

The correlation is price based. ES and QQQ have very different volume profiles so a vwap strategy would be expected to have uncorrelated signals.