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No
rebuke from me. You are 100% correct that one would tend to either
take on more positions or increase the size of positions using
profits. Either of these could be called
"compounding".
<FONT face=Arial color=#0000ff
size=2>
I just
don't think that compounding has any place in parameter selection.
I've already given dozens of examples but I'll do one more.
<FONT face=Arial color=#0000ff
size=2>
Let's
say that I had a moving average crossover system (which I wouldn't
use). Let's also assume that we are investing $10,000 per trade
initially. I optimize for one set of parameters to use on a basket
of stocks. One set of parameters generates a trade for AOL that
results in a $1.5 million profit for the $10,000 investment. If I
then re-invest that $1.5 million (in backtesting), I could end up with some huge
returns on the next trade, based on my original portfolio investment
size. This huge profit and resultant compounding (in
backtesting) could distort the fact that those very same parameters generated
far less in profits for the other 99 stocks. In my opinion, I would
rather use parameters that missed the AOL trade and did better on the other 99
stocks. Keeping AOL in the basket (for backtesting) and compounding
the profits from that one trade simply doesn't fit in how I select
parameters.
<FONT face=Arial color=#0000ff
size=2>
Once
I'm finished selecting my parameters, I will use Scan over all 100 stocks in
basket. I will, at this point, turn on compounding. If the
parameters I've selected without the benefit of AOL and without the benefit of
compounding happen to pick up the AOL trade, it's a bonus. I'd
rather miss the AOL trade (in backtesting) and do well on the rest of the stocks
in the basket. In my opinion, this approach has a much better chance
of being profitable in the future. A fantastic-looking equity curve
based on the benefit of hindsight does little to satisfy my
investors.
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: Fred
[mailto:fctonetti@xxxxxxxxx]Sent: Friday, April 18, 2003 6:16
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: [amibroker] Re:
Pairs Trading (a definition for
Dingo)Chuck,Your "go" at it is clearly a
better description then mine ... I'm still waiting for your rebuke of
my description of compounding whether it is in terms of scaling up bet
size or increasing the number of securities potentially invested in to be
virtually the same in terms of how that affects system design, testing and
optimization in that ones aim is still to yield consistant returns and
drawdowns on a percentage basis.--- In amibroker@xxxxxxxxxxxxxxx,
"Chuck Rademacher" <chuck_rademacher@x> wrote:> MessageI'll
have a go at defining pairs trading for you.> > To me, there are
two different kinds of pairs trading (fundamental and>
technical).> > Before I get into that, however, I'll start by
telling you that pairs> trading is NOTHING MORE than buying one
stock and shorting another.> Usually, the dollars invested would be the
same for each stock.> > Fundamental pairs trading would be based
on YOUR INTERPRETATION of the> fundamentals for those two
companies. If you spent the time to review the> annual
reports for Ford and General Motors, for instance, you might
decide> that FUNDAMENTALLY Ford should outperform General Motors
over the next six> months. So, you would buy Ford and short
General Motors. Your trade, in> theory, should not be
affected by any move in the entire market or even the> automotive
sector. At the end of the six-month period you would
liquidate> both positions.> > Technical pairs trading
is a little more complex. Again, you would be> buying
one stock and shorting another. Most pairs traders might only
trade> a "pair" that were in the same sector, but that isn't
necessarily a> requirement. The idea here is that you find
two stocks whose average daily> returns move very much in
unison. I won't get into the math for determining> this, but
I'm sure you get the picture. Let's say that you
discover that> the daily returns for Ford and General Motors almost
aways move together.> You also observe that if the returns move
apart.... they tend to come back> together. You
also observe the maximum amount that they varied over some> period
of time. When you see them move apart by that amount again,
you> simply short the one with the higher returns and buy the one with
the lower> returns. Finally, you just wait for the returns to
come back together and> liquidate both
positions. Again, the theory is that any major
move in> the overall market has no effect on your net
position.> > I might add that many, if not most, of the
professional fund managers using> pairs trading haven't done very
well over the last quarter, generating> negative returns for their
investors. I've been pairs trading for two>
years, netting just over one percent per month for investors in that>
particular fund. I can also tell you that, in my opinion,
any attempt at> fundamental pairs trading is doomed for
failure.> -----Original Message----->
From: dingo [mailto:dingo@xxxx]> Sent: Friday, April 18,
2003 3:13 PM> To:
amibroker@xxxxxxxxxxxxxxx> Subject: RE: [amibroker] Re:
Dynamic Indicators Poll -- VOTE AGAIN, PLEASE> >
> Could you define "pairs trading" please?>
> Thx!> >
d> -----Original
Message-----> From: Fred
[mailto:fctonetti@xxxx]> Sent: Friday, April
18, 2003 3:08 PM> To:
amibroker@xxxxxxxxxxxxxxx> Subject: [amibroker]
Re: Dynamic Indicators Poll -- VOTE AGAIN, PLEASE> >
> Yes. I know. See my previous post, but for
example I don't want to> have to write my
own Stdev routine for variable periods where
it> would require a For loop or a script to get
it done. As I've said> before, IMHO
the best thing about AB today is it's speed and the
LAST> thing I want to do is slow it down w/For
loops if I don't have to.> The best thing
about the future of AB is of course the support
&> potential enhancements and I'll be happy
to take the latter in> whatever order Tomasz
thinks best with my own personal preference
at> the moment being the fixing of position
size transactions being> automatically limited
to total available cash followed by some
other> aspects of portfolio trading i.e.
pairs and ranking etc.> > --- In
amibroker@xxxxxxxxxxxxxxx, "DIMITRIS TSOKAKIS"
<TSOKAKIS@xxxx>>
wrote:> >
Fred,> > take a look
at> >> >
per=10+Cum(1)%20;//variable period from 10 to
29> >
StochKa=MA(100*(C-LLV(L,per))/(HHV(H,per)-LLV(L,per)),3);>
>
StochDa=MA(MA(100*(C-LLV(L,per))/(HHV(H,per)-LLV(L,per)),3),3);>
>
Plot(StochDa,"",1,1);Plot(StochD(),"",4,8);>
>> > for
example.> >
DT> > --- In amibroker@xxxxxxxxxxxxxxx,
"Fred" <fctonetti@xxxx> wrote:> >
> Tomasz,> >
>> > > I agree completely that these
are two different areas ... to me> >
they> > > are both important with (1)
being higher priority then (2) ...> >
>> > > With regards to (1) and more
specifically those functions like>
ATR> > > that require multiple arrays ...
I understand and in the case of> >
ATR> > > I'm not sure I care if this is
even dealt with as again it's>
simple> > > enough like my example w/MACD
to create ones own ATR with a>
Foreign> > > symbol using straight
AFL.> > >>
> > In the case of a stochastic though it's clearly valid
to> calculate>
> it> > >
as> > >>
> > 100 * (C - LLV(C, n)) / (HHV(C, n) - LLV(C,
n))> > >>
> > as opposed to using highs and lows. However here again I'm
not> >
sure> > > I care as it's easy enough to
do these in straight AFL with n>
being> > > time variant since HHV and LLV
are already have the capability of> >
> being time variant.> >
>> > >>
> > --- In amibroker@xxxxxxxxxxxxxxx, "Tomasz
Janeczko"> >
<amibroker@xxxx>> > >
wrote:> > > >
Hello,> > >
>> > > > As I mentioned in the
other post of mine there are> > > >
TWO INDEPENDENT areas:> > >
>> > > > 1. Make input data array
available for functions like RSI> > >
> 2. Make second argument (period) accept array too
(variable> >
period).> > >
>> > > > Somehow people mix those 2
areas.> > >
>> > > > Fred speaks that he wants
all functions to cover at least> > > >
area (1).> > >
>> > > > The posts of Mark refer to
area (2).> > >
>> > > > Let me show you
example:> > >
>> > > > RSI( period ) - this
function has no input data array (uses>
CLOSE> > >
array> > > > indirectly) and accepts
static period> > >
>> > > > (1) RSIa( ARRAY, period )
- this function accepts input data> >
array> > > but
accepts> > > > only static
period> > >
>> > > > (2) RSIa( ARRAY,
dynamic_period ) - this function accepts>
input> > > data
array> > > > and accepts both static
and dynamic_period.> > > > (NOTE:
Current version of AB does NOT support this>
RSIa 'flavour'> > >
yet)> > >
>> > >
>> > > > As to (1): implementation
of this is relatively easy.> > > >
There is one caveat however: many analytical
functions> > > > in fact use MORE than
one input array. For example Stochastics>
use> > > > Close, Open and High arrays
as inputs.> > > > ATR too needs OHLC,
not only close.> > >
>> > > > As to (2): not every
function is suitable for this kind of> >
> operation. Although> > > >
theoretically it is possible to rewrite every function
to> accept> >
> such 'variable> > > > periods'
the practice shows that transformations that
are> >
recurrent> > > in
nature> > > > (exponential averages
for example) are extremely 'sensitive' if>
> > parameter(s)> > > > change
to fast. A kind of "frequency modulation" effect
appears> > > that may
produce> > > > distortions therefore
one should be careful working with>
adaptive> > >
systems> > > > using recurrency-based
transformations.> > >
>> > > > Best
regards,> > > > Tomasz
Janeczko> > > >
amibroker.com> > > > ----- Original
Message -----> > > > From:
<uenal.mutlu@xxxx>> > > > To:
<amibroker@xxxxxxxxxxxxxxx>> > >
> Sent: Friday, April 18, 2003 5:28 PM> >
> > Subject: Re: [amibroker] Dynamic Indicators Poll -- VOTE
AGAIN,> > >
PLEASE> > >
>> > >
>> > > > > And IMHO
also> > > > >
LINEARREG, LINREGSLOPE, TSF> > > >
> should be removed from your list. Please>
> > > > check the remaining too... Test it in AFL editor (it
will> >
inform> > >
you> > > > > via a small hint
window about the params after you type the>
> > opening brace).> > > > >
UM> > > >
>> > > > > ----- Original
Message -----> > > > > From:
<uenal.mutlu@xxxx>> > > > >
To: <amibroker@xxxxxxxxxxxxxxx>> >
> > > Sent: Friday, April 18, 2003 5:21
PM> > > > > Subject: Re:
[amibroker] Dynamic Indicators Poll -- VOTE>
AGAIN,> > >
PLEASE> > > >
>> > > >
>> > > > > > Hi
mark,> > > > > > can you clarify
BBANDBOT and BBANDTOP;> > > > >
> IMHO they both already do accept user defined
arguments> > > > > > for all
the 3 possible parameters to them.> > >
> > > UM> > > > >
>> > > > >
>> > > > > > ----- Original
Message -----> > > > > > From:
"markf2" <feierstein@xxxx>> > >
> > > To:
<amibroker@xxxxxxxxxxxxxxx>> > >
> > > Sent: Friday, April 18, 2003 4:03
PM> > > > > > Subject:
[amibroker] Dynamic Indicators Poll -- VOTE
AGAIN,> > >
PLEASE> > > > >
>> > > > >
>> > > > > > > In Message
38132, Tomasz pointed out that HHV, LLV,> >
HHVBars,> > >
LLVBars,> > > > > > > DEMA,
TEMA, MA, WMA, REF, and SUM already work with>
dynamic> > > > > > >
parameters. When I updated the poll to reflect this,
ALL> > > votes
were> > > > > > > lost so
please vote again if you're still interested,
LOL.> > > > > >
>> > > > > > > <A
href="">http://groups.yahoo.com/group/amibroker/surveys?id=1071266>
> > > > > >> > > >
> > > I apologize for the confusion. The fact that the
above> > > indicators
and> > > > > > > functions
accept dynamic parameters was reflected in>
> release> > > notes
but> > > > > > > not in the
4.30 users guide that I used to make the>
poll.> > > The
fact> > > > > > > that so
many of you voted for them shows you didn't
know> > > either,
and> > > > > > > I've asked
Tomasz to include this information in the
next> > > > > > >
documentation update.> > > > > >
>> > > > > > >
Mark> > > > > >
>> > > > > > > "No good
deed goes unpunished."> > > > >
> > --Steve Karnish> > > >
>> > > >
>> > > >
>> > > >
>> > > > > Send BUG REPORTS to
bugs@xxxx> > > > > Send SUGGESTIONS
to suggest@xxxx> > > > >
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