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--- In amibroker@xxxx, "David Holzgrefe" <dtholz@xxxx> wrote:
> Maybe a few other could run it on there indexes to see if performs
the same ?
>
> an give me some feed back as the results seem a little to good ..
>
>
> Thanks David
>
> prevclose = ref( close, -1);
> signl = iif( close > prevclose , 1, 0 );
>
> BUY = CROSS(bbandbot(close, 15, 2),close) AND RSI(14) < 35 AND
signl = 1;
>
> SELL = CROSS(bbandtop(close, 15, 2),close) AND RSI(14) > 70;
> an give me some feed back as the results seem a little to good ..
>
>
> Thanks David
>
> prevclose = ref( close, -1);
> signl = iif( close > prevclose , 1, 0 );
>
> BUY = CROSS(bbandbot(close, 15, 2),close) AND RSI(14) < 35 AND
signl = 1;
>
> SELL = CROSS(bbandtop(close, 15, 2),close) AND RSI(14) > 70;
The major problem with this simple system is the huge drawdowns
between those "winning" trades. Look at the last few months for
AAPL, Apple Computer.
The system did its last buy in late May 2000 at ~45, the stock then
went to 14 in Dec 2000 before rallying. No one should or could live
with a drawdown like that....
The problem is one that is commonly seen in a simple indicator based
system. You get the initial trade entry and then the exit conditions
are not satisfied for months or years. Meanwhile the price goes
wrong and you are still in the stock. Sure it backtests "well" with
nice profits and a hit rate in the 70-90% area, but it is a bad
system.
The thing that most back tests is not telling you is the maximum
drawdown (maximum adverse excursion) during the trade. Usually you
are provided data that lists the drawdown from the entry point.
While this is a useful number in its own right it can mislead you
drasticaly.
In the AAPL example, price got up to the 63 and change area. If you
had bought at the 45 price and exited at 55-60 you would have had a
nice trade. However, once the price got to 63 it went to 14.
Maximum drawdown for this trade was 63-14 = 49, really ugly....
With this system there is no assurance the price will exceed the
upper BB with an RSI above 70. Now that may be a good exit point but
it may never be reached. So, the system needs to have other exits
added to it until you are guaranteed there will be a timely exit that
controls the max drawdown.
As an aside, I have not looked at the work done recently by Dimitris
but I suspect the same problems may be there as well. Several years
ago I did a lot of work with divergences. They can provide really
nice entries, but will miss some entries because there may not be a
divergence. Even worse, they will miss exits because the divergence
may not occur. So you have to also include fixed exit levels or
trailing stops or some other exit that will signal for "every" exit
required. Again I have not had time to look at his work but I would
look for this possibility.
Bottom line, back testing is a tricky business and one should always
examine the signals applied to the chart to see if the signal "makes
sense" by not missing entries or worse, missing exits. Take care of
the big drawdowns and the system profits will usually be fine.
If you have questions on this, feel free to ask....
Trader
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