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Chuck,
Just spent a lot of time trying to catch up on more than 24 hours
worth of posts and could not pass up the opportunity to comment upon
your posts during that period.
Wish I was as articulate about these matters as you.
Regarding:
Compounding... I agree. Fixed position sizing is mandatory.
Positionsize compounding only skewx trading system results to the
point of losing all relevence in real world trading.
"individual set of parameters for each stock." Talk about 'curve
fitting'
Unlike you, I don't use 'extinct' stocks, only because my data
provider eliminates extinct stocks from my database.
Concerning the statement "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." While unusual, I have
experienced adverse 'gap' conditions that exceed $10K, it is more
normal for Stop Loss orders get me out of positions at fractions of a
percent below my entry level.
"As I explained in previous email, the losses CAN BE more
than the investment on a few short trades." We differ here... I have
NEVER experience losses in a short position which even approached the
original investment.
It is late and I need to call it quits for the night.
But I hope you accept my compliments for being able to articulate a
rational trading approach.
Phsst
--- In amibroker@xxxxxxxxxxxxxxx, "Chuck Rademacher"
<chuck_rademacher@x> wrote:
> MessageAnswers to Dingo's questions below:
>
> 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.
>
> 2. Which date ranges do I use? I pretty much always use 1992 to
current
> date.
>
> 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.
>
> 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.
>
> 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.
>
> 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.
>
>
> 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".
> -----Original Message-----
> From: dingo [mailto:dingo@x...]
> Sent: Thursday, April 17, 2003 11:10 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: RE: [amibroker] To compound or not to compound... that is the
> question
>
>
> 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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