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Hello Jim,
Thank you for your very interesting e-mail.
I agree that stock selection has tremendous impact on backtesting results.
During my own research I checked the performance of the very
same system on different groups of stocks and the results
was from loosing money on most of the trades to
outperforming B&H by 400%. The system clearly preferred
less volatile, blue chip stocks.
This gave me an idea to incorporate the filter that will eliminate
highly volatile stocks and the results of backtesting were
much more consistent across different groups.
What I want to say is that some of the rules that you
apply using your brain could be coded into AFL.
Of course there are many subtle things that are very hard
or even impossible to code (in any formula language).
To summarize:
1. yes, comparing backtesting results can be misleading but
does it mean we shouldn't do that at all?
I guess giving backtesting results for different markets/groups
will give valuable information on the behaviour of the system
2. a private investor with not so large amount of cash is basically
forced to narrow his trades more than the mechanical system would
suggest and I agree that your approach can work best in this case.
BTW: After your e-mail I am still wanting to hear other people opinions :-)))
Best regards,
Tomasz Janeczko
===============
AmiBroker - the comprehensive share manager.
http://www.amibroker.com
----- Original Message -----
From: <jvarn359@xxxx>
To: <amibroker@xxxxxxxxxxxxxxx>
Sent: Tuesday, July 10, 2001 7:15 AM
Subject: [amibroker] Comments on Backtesting
> Jim:
> > I'd like to suggest that the user community establish a
> > standard that these systems are backtested to for the purpose
> > of including these results in the AFL library.
>
> TJ:> I wish other people on this group speak up about their
> > proposals so we can find something useful. Maybe a poll would
> > be useful?
>
> Are you 'sure' you want people to speak up? You might want to
> reconsider after I give my opinions :=) What I'm about to say might
> be unpopular but I'll take a risk and speak anyway.
>
> I believe mechanical backtesting is "mostly" spurious and I don't
> think it is wise to rank AFL's by backtesting results.
>
> As proof consider well-known swing trader Gary B. Smith. He buys
> breakouts over trendlines. I've modeled his simple system and it
> generates poor returns.... but Mr. Smith's trading has made him a
> millionaire. I'm no millionaire but I've turned in some good trades
> lately using simple divergences. These too fail under backtesting
> but the profits in my account are no less real.
>
> Here's why backtesting underperforms a good trader: stock selection.
> I think Smith and I use the same approach. I use Explorations to
> generate a short list of candidates to trade. I put the results into
> a watch list, select the first stock, then use the down arrow to flip
> thru the charts. If I see a price and volume pattern I "like" then I
> buy. Patterns I "like" are based on accumulated experience from
> numerous trades over the years. When I use AmiBroker I never
> backtest... I have no need or desire to have little white and red
> arrows cluttering up my charts!
>
> The problem with backtesting is that it buys every candidate, even
> the ones with bad charts. Traders outperform the computer because
> the eye and brain are very good at visual pattern recognition and
> integrating other factors such as how the major indexes "feel",
> economic events, sector rotation, etc. Compounding the problem is
> that pattern recognition and external data integration are updated
> daily by my brain, whereas the mechanical system holds the stock
> until a rigid exit is triggered.
>
> If one is serious about mechanical backtesting then there is no need
> for a charting program. Just use a database or spreadsheet with the
> trading algorithms (see the Mechanical Investing threads on Motley
> Fool). Let the database or spreadsheet to tell you when to buy and
> sell. No need to ever look at a chart again.
>
> To sum up: backtesting tests the *computer* as trader not the *human*
> as trader.
>
> Ranking AFL's by backtesting scores can mislead people. A negative
> return system could generate positive returns in the hands of a good
> trader through careful chart selection. Conversely, a system that is
> labelled the "best" may do poorly in the hands of some traders.
>
> Now that I've said that, I don't mind if AmiBroker has backtesting if
> most people want that feature. Good programs come with a full chest
> of toys and its up to each user to decide which toys to play with.
> But I hope that the focus of AmiBroker stays primarily with charting.
>
> Regards,
>
> Jim Varney
>
>
>
>
>
> Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
>
>
>
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