Feature selection can improve both predictive accuracy and intuition about regime-dependence of your trading strategy.
- Find out the most important factors affecting profitability.
- Rank these factors by importance scores.
- Use only factors with high scores to predict profitability.
- Improves out-of-sample predictive accuracy by building more parsimonious models. (See our recent blog post.)
Example: A short volatility strategy
- Use strategy returns as target variables (labels).
- Use VIX, 1-day SPY return, interest rate change, etc. as predictors (features).
- Feature selection may tell us: