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[amibroker] Compounding, etc. (for Fred)



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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".
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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.
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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.
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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>     > > > 
  >>     > > > 
  >>     > > > 
  >>     > > > 
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  bugs@xxxx>     > > > > Send SUGGESTIONS 
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