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Chuck,
I'm sure you'd agree, wouldn't you ?, that one way or another you
compound. If you are not compounding by increasing bet size then you
are compounding by increasing the number of stocks you'll potentially
take simultaneous positions in as equity grows, right ?
--- In amibroker@xxxxxxxxxxxxxxx, "Chuck Rademacher"
<chuck_rademacher@x> wrote:
> 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.
>
> 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.
>
> 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.
>
> As I said... for what it's worth...
> -----Original Message-----
> From: Bob Jagow [mailto:bjagow@x...]
> Sent: Thursday, April 17, 2003 2:21 AM
> To: Amibroker
> Subject: [amibroker] FW: [aaft_ta] Re: TradingRecipes
>
>
> Re the "portfolio level testing" magic bullet.
>
> Bob
> -----Original Message-----
> From: Palmer Wright [mailto:palmerw@x...]
> Sent: Wednesday, April 16, 2003 8:27 PM
> To: aaft_ta@xxxxxxxxxxxxxxx
> Subject: 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
> ----- Original Message -----
> From: Michael Guess
> To: 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.
>
> Michael
>
>
>
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