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Reply
to Fred:
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Yes...
and no.
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<FONT face=Arial color=#0000ff
size=2>Absolutely, in real time trading I am compounding.
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To
determine parameters via optimization.... not if my life depended on
it! And, I guess my life does depend on it, as I make my living
managing funds for others.
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I
mentioned one trade (AOL) where my system made $1.5 million on a $10,000
investment. That's not bragging... I'm sure you could come up with a
system that could achieve similar performance. Since the average
trade generated a profit of $2,700 for every $10,000 invested, the AOL trade
could cover up lots of bad trades made using one parameter set.
Compounding that trade would exacerbate the problem. A minor tweak
to the parameters could cut out the AOL trade, yet that very tweak could improve
performance going forward.
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When
choosing parameters, I want plain vanilla trades, each standing on their own
merit, with no compounding.
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We may
have to agree to disagree. It's like absolute gospel to me and I
cannot see clear to do it any other way.
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<FONT face="Times New Roman"
size=2>-----Original Message-----From: Fred
[mailto:fctonetti@xxxxxxxxx]Sent: Thursday, April 17, 2003 3:16
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: [amibroker] FW:
[aaft_ta] Re: TradingRecipesChuck,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@xxxx]> 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@xxxx]> 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> > >
> Your use of Yahoo! Groups is subject to the Yahoo! Terms
of Service.>
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