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Re the
"portfolio level testing" magic bullet.
<FONT
color=#000080>
Bob
<FONT face=Tahoma
size=2>-----Original Message-----From: Palmer Wright
[mailto:palmerw@xxxxxxxxxxx]Sent: Wednesday, April 16, 2003 8:27
PMTo: aaft_ta@xxxxxxxxxxxxxxxSubject: Re: [aaft_ta] Fwd:
Re: Available Portfolio testing programs for TS2000i
Since Michael forwarded the two messages (see
below), he added four additional ones. The issue about whether a "basket
system" like Aberration is worth trading I will not discuss here (I still trade
it). The other main issue is about the effect of compounding when testing with
TR (Trading Recipes), and I comment here on that.
Traders buy TR because it can test portfolios of
systems and markets using position sizing. A position-sizing strategy such as
fixed-fractional money management brings two advantages: it normalizes markets
(eg., calculating many contracts for corn, but few for natural gas), and limits
entry risk for each position to a fixed- fraction of current equity--thus
preventing overtrading. If you do not use TR, I do not know how you
can get the large returns that compounding multiple markets can
bring.
Leslie Walko points to the potential danger of
curve fitting caused by compounding. I agree, and have been concerned for years
about how one market in a portfolio (commodity X) by being dramatically
profitable in a single year can misleadingly bias the results of the whole
portfolio.
During a multi-year test in TR, starting equity
is low, perhaps $100,000, but compounding raises equity to many million in later
years. The one-year outperformance of commodity X cand produce two kinds of
curve-fitting bias: early-years bias and end-years bias. Mark Johnson's message
describes the first, where X gives "a big turbocharged boost" to the portfolio's
equity, which then gives a head-start boost to the number of trades in all the
commodities traded. The second occurs when X's monster trades occur in the final
years of the simulated time period when the large number of contracts makes X's
profit far larger than if its big year came early. Here the
profits contributed by X dwarf what they were in the first
case.
As the message from M points out, we can avoid
such biases by normalizing with a fixed-dollar bet size in testing to remove the
galloping equity effect. I proposed this method in 1999, and still use it to
compare with the compounded performance. I confess, however, that my testing has
failed to find as much performance bias as I suspected I would find. The method
is most important when selecting markets for a portfolio.
Palmer Wright
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Michael
Guess
To: <A title=aaft_ta@xxxxxxxxxxxxxxx
href="">aaft_ta@xxxxxxxxxxxxxxx
Sent: Sunday, April 13, 2003 9:14
AM
Subject: [aaft_ta] Fwd: Re: Available
Portfolio testing programs for TS2000i
This is for Pat Mazur & Palmer Wright. Others
are invited to comment. I forwarded these two messages from another list
because we have discussed these issues in the past. It appears one of the
posts is saying Trading Recipes is in error in the way it calculates. In fact,
that it curve fits data in a particular case. Comments are
invited.MichaelYour
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