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For
what it is worth, I use fixed bet size for all backtesting purposes.
I coudn't imagine backtesting/optimizing using any other approach. I even
go a step further if I'm doing any optimizing. I recently posted an
equity curve showing something like $80 million in profit. Within
that $80 million, the top 100 stocks (out of 13,500) generated $20 million in
profits. AOL, by itself, generated $1.5 million in profits. In each
case, the original trade was only $10,000.
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size=2>
As I
said, I go a step further than just using a fixed bet size. After my first
pass at optimizing, I remove the top performing 100 stocks. I then
re-optimize without those stocks. Granted, I could end up with some new
"top" stocks. However, my objective is to remove the extremely large
winners so that the profits from those stocks don't cause me to select
parameters on the edge of the parameter space.
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size=2>
I
don't bother removing the worst performers as the largest loss might be
something like $16,000 (even though the original trade was only
$10,000). This can happen if a short trade goes against
you.
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size=2>
As I
said... for what it's worth...
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: Bob Jagow
[mailto:bjagow@xxxxxxxxxxx]Sent: Thursday, April 17, 2003 2:21
AMTo: AmibrokerSubject: [amibroker] FW: [aaft_ta] Re:
TradingRecipes
Re the
"portfolio level testing" magic
bullet.
<FONT
color=#000080>
<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 use of Yahoo!
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