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Thanks
VERY much chuck!
<FONT face=Arial color=#0000ff
size=2>
A lot
of food for thought.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>d
<FONT
face=Tahoma size=2>-----Original Message-----From: Chuck Rademacher
[mailto:chuck_rademacher@xxxxxxxxxx] Sent: Thursday, April 17, 2003
5:08 PMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE:
[amibroker] To compound or not to compound... that is the
question
More
answers for Dingo:
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>1. You asked which metrics I might use for selecting "best"
parameters. Things like Sharpe Ratio, K-Ratio (smoothness), come
to mind. I have more than 200 objective functions that are
calculations like "RAR/MaxDD", etc. I have my favourites that come
and go. I have tools to decide which objective function works best
when the system is then carried forward out-of-sample.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>2. You asked about saving some data for out-of-sample. This
too is a complex issue. To me, there are two aspects to your
question. When I'm trying to decide if the system has merit, I do two
things. I will optimize for the "best" parameters (various ways,
as discussed previously) on data between 1994 and 2002. I then
will run that system/parameter set backward two years and forward one
year. If the results look good (hard to define, of course), then I will
start to trade the system. It is at this point that I will
optimize up until the current date to decide on the parameter set I will use
for realtime trading. I may repeat this process every three
months, or so, depending on how many trades are generated by the
system.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>3. You said " I take it you're not a disciple
of stocks having their own individual params? ".
There is no way that I would EVER use a different
parameter set for individual stocks. Yes, MSFT does look different
than IBM. But tomorrow, they can both look the same or completely
different. I want one set of parameters that is going to
work on MSFT today and tomorrow, even if MSFT starts to look more like
IBM. We can all make systems that perfectly curve-fit
to each stock in the universe. To me, that's a good way to sell
software, but not to trade my money.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>4. I told you how I would use AB to sort my signals by
"something", such as P/E and then take only the top or bottom sorted
stocks. I think you are asking how I would do this outside of
AB. I only use AB to develop and test system ideas. I
don't think there is any tool better for the job and I have used most of
them. Once I have a system that I want to trade, I code the logic
in a portfolio manager that I developed in Delphi. That program
knows exactly how much money is available for taking new trades tomorrow and
will rank the orders by various means (proprietary but no mystery). It
will then connect to my broker's server and place the orders. I do
not look at what is being traded and I never look at a chart.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Whew... I think I answered everything for you. Again...
just my opinions and everybody has at least one.
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: dingo
[mailto:dingo@xxxxxxxxxx]Sent: Thursday, April 17, 2003 4:41
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE:
[amibroker] To compound or not to compound... that is the
question
<FONT face=Arial color=#0000ff
size=2>Thanks Chuck!
<FONT face=Arial color=#0000ff
size=2>
My
further questions in red below:
<FONT face=Arial color=#0000ff
size=2>
<FONT
face=Tahoma size=2>-----Original Message-----From: Chuck
Rademacher [mailto:chuck_rademacher@xxxxxxxxxx] Sent: Thursday,
April 17, 2003 4:00 PMTo:
amibroker@xxxxxxxxxxxxxxxSubject: RE: [amibroker] To compound
or not to compound... that is the question
<FONT face=Arial color=#0000ff
size=2>Answers to Dingo's questions below:
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>1. Which column(s) to use when deciding which parameters are
"best"? I actually take the trade results to another program,
but given the columns that are available in AB, I would use total net
profit and/or average trade. Hopefully, some of the parameters
will be same at the top of both of those lists.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#ff0000
size=2>I too have another program and am
curious as to what calculated results would lead to the "best"
params?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>2. Which date ranges do I use? I pretty much
always use 1992 to current date.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#ff0000
size=2>You go all the way to the current
period? Do you not test out of sample?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>3. I use all 13,500 active and extinct stocks that have ever
traded since January, 1992 that were over $1 on at least one day and had
an average 50-day volume of 75,000 shares on at least one
day.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>4. Do I set aside any losing trades/stocks?
No. Since my largest loss can only be $10,000 and the profit
can be in the millions, I keep in all losing trades. As I explained
in previous email, the losses CAN BE more than the investment on a few
short trades.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>5. How do I determine that the best parameters (if I include
huge profitable trades) could be on the edge of the parameter
space? I can't really determine that information, nor do I
really care. I remove those stocks from my watchlist and
re-optimise. If I end up with a new list of huge winners, I
might repeat the process. I just don't want to choose a
parameter that squeezes in a couple of huge trades but is inferior on the
rest of the market.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#ff0000
size=2>You method sure is counter intuitive
until I think about your reasoning. I take it you're not a disciple
of stocks having their own individual params?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>6. How do I decide which signals to take every day (if I had
more signals than cash)? Using AB, I would place something
that I could sort the signals by that I have proven to myself increases
the likelihood of the signal being a good one. For simplicity,
let's say that I was an advocate of using low P/E for buying stocks (I'm
not). I would add a column to my Explore that showed the current
P/E.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#ff0000
size=2>If you were to make this decision
independent of AB then would you make the
decision?
<FONT face=Arial color=#ff0000
size=2>
<FONT
color=#0000ff>I'm quite happy to discuss any of this
further. Obviously, these are only my views and they are no
better than those you or others might have on the subject. I
have the benefit of trading for (too) many years and the possible
disadvantage of "being past it".<SPAN
class=843033320-17042003>
<FONT
color=#0000ff><SPAN
class=843033320-17042003>
<FONT
color=#0000ff><FONT
color=#ff0000>Do you ever re-optimize for the purpose of calc'ing new
params? If you do how do you decide when it is time to do
that?
<FONT
color=#0000ff><SPAN
class=843033320-17042003>
<FONT
color=#0000ff><FONT
color=#ff0000>Thanks for your
answers!
<FONT
color=#0000ff><SPAN
class=843033320-17042003>
<FONT
color=#0000ff><FONT
color=#ff0000>d
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: dingo
[mailto:dingo@xxxxxxxxxx]Sent: Thursday, April 17, 2003 11:10
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE:
[amibroker] To compound or not to compound... that is the
question
<FONT face=Arial color=#0000ff
size=2>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?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Re your param selection method: Do I understand the steps
correctly:
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>1. You optimize for the best params
<FONT face=Arial color=#0000ff
size=2> a. Based on what
column or calculation?
<FONT face=Arial color=#0000ff
size=2> b. What date ranges
would you be using currently?
<FONT face=Arial color=#0000ff
size=2> c. What subset of
stocks would you be optmizing on?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>2. You set aside the the top 100.
<FONT face=Arial color=#0000ff
size=2> a. Do you set aside
any at the bottom?
<FONT face=Arial color=#0000ff
size=2> b. How did
you determine that the first set of params would be at the edge of
the parameter space?
<SPAN
class=671315814-17042003><FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>3. You reoptimize the resultant set from step 2 and those are the
ones you use.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Given the size of your trading capital how do you decide what
stocks to trade on a particular day?
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>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.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Thanks for any comments you choose to make.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>d
<FONT
face=Tahoma size=2>-----Original Message-----From: Chuck
Rademacher [mailto:chuck_rademacher@xxxxxxxxxx] Sent:
Thursday, April 17, 2003 6:58 AMTo:
amibroker@xxxxxxxxxxxxxxxSubject: [amibroker] To compound
or not to compound... that is the question
<FONT face=Arial color=#0000ff
size=2>Reply to Fred:
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Yes... and no.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Absolutely, in real time trading I am
compounding.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>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.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>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.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>When choosing parameters, I want plain vanilla trades, each
standing on their own merit, with no compounding.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>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.
<BLOCKQUOTE
>
<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.>
> Yahoo!
Groups
Sponsor>
ADVERTISEMENT> > > >
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