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Dingo,
I assume you addressed this to Chuck, but I'll give you my own take
on 1a of what you asked ...
1a. I have tried lots of combinations of things to optimize on and
have pretty much settled on what I and some others refer to as MAR
which is CAR / MDD. This has the advantage of finding parameters
that simultaneously elevate CAR while keeping down DD's. There are
other steps involved here to assure that the parameters chosen are as
robust as they can be and sometimes at the cost of a little MAR but
that's another topic. When writing systems and testing them for full
compounding whether that compounding takes the form of increased bet
size or increased number of simultaneous trades that can be made, the
equity curve should be as close as possible to a straight line on a
log scale. KRatio is an indication of the straightness of the equity
curve but I also like to see it plotted. The other advantage to
looking at equity curves on a log scale is that for example a 10% DD
looks the same regardless of where on the chart it occurs. If you
plot the equity curve on an arithmetic scale the farther to the right
the larger dd's occur the more insignificant (falsely) they appear to
be.
--- In amibroker@xxxxxxxxxxxxxxx, "dingo" <dingo@xxxx> wrote:
> I can understand and appreciate why you use fixed trade sizes in
order
> to get the best parameters. But how do you get a reasonable measure
of
> drawdowns that way? Do you use some other technique to evaluate
> drawdowns?
>
> Re your param selection method: Do I understand the steps
correctly:
>
> 1. You optimize for the best params
> a. Based on what column or calculation?
> b. What date ranges would you be using currently?
> c. What subset of stocks would you be optmizing on?
>
> 2. You set aside the the top 100.
> a. Do you set aside any at the bottom?
> b. How did you determine that the first set of params would
be
> at the edge of the parameter space?
>
> 3. You reoptimize the resultant set from step 2 and those are the
ones
> you use.
>
> Given the size of your trading capital how do you decide what
stocks to
> trade on a particular day?
>
> I'm not trying to pick a fight here I'm intensely curious as I've
been
> struggling with these questions for quite some time now.
>
> Thanks for any comments you choose to make.
>
> d
>
> -----Original Message-----
> From: Chuck Rademacher [mailto:chuck_rademacher@x...]
> Sent: Thursday, April 17, 2003 6:58 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: [amibroker] To compound or not to compound... that is the
> question
>
>
> Reply to Fred:
>
> Yes... and no.
>
> Absolutely, in real time trading I am compounding.
>
> 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.
>
> 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.
>
> When choosing parameters, I want plain vanilla trades, each
standing on
> their own merit, with no compounding.
>
> 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.
>
> -----Original Message-----
> From: Fred [mailto:fctonetti@x...]
> Sent: Thursday, April 17, 2003 3:16 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: [amibroker] FW: [aaft_ta] Re: TradingRecipes
>
>
> 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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