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Sorry,
Thomas, I must have not been very clear in my explanation.
<SPAN
class=718131400-19042003>
Here
are my steps for parameter selection (right or wrong):
<SPAN
class=718131400-19042003>
<SPAN
class=718131400-19042003>1. Optimize over the entire universe of
stocks that traded between 1992 and today (13,500 stocks after filtering for
minimum price/volume). This process is looking for ONE parameter set
across all stocks.
<SPAN
class=718131400-19042003>2. Check for outliers (huge profits or
losses). This is more important for long-term systems that might
have bought in 1995 and sold and the peak in 2000.
<SPAN
class=718131400-19042003>3. Remove the stocks with
the largest outlier trades. In the example I gave, trading
$10,000, I removed the stocks where single trades generated more than (say)
$200,000. AOL, MSFT and
a few others generated more than $1 million in profits so I don't want those
trades in my parameter selection.
<SPAN
class=718131400-19042003><SPAN
class=718131400-19042003>4. Re-optimize to get "best" parameter set
over all remaining stocks. I don't really want to get into
defining "best" here.
<SPAN
class=718131400-19042003>5. I might repeat steps 3 and
4 if I get a new set of large outliers.<FONT
face=Arial><SPAN
class=718131400-19042003>6. Put the removed stocks back into
the watchlist.
<SPAN
class=718131400-19042003>7. Run Scan to see equity curve with or
without compounding.
<SPAN
class=718131400-19042003>8. When it comes to live trading, my
systems are looking at all stocks. Removing stocks from the universe
was only done to achieve (IMO) better parameter selection.
<SPAN
class=718131400-19042003>
<SPAN
class=718131400-19042003>
While
I'm at it, I may as well tell you the steps I take to decide if the system is
even worth doing the steps delineated above. Here is what I do to
see if the system has any merit in the first place:
<SPAN
class=718131400-19042003>
<SPAN
class=718131400-19042003>1. Optimize the system over data between 1994 and
2001 (approximately) to find the "best" parameter set.
<SPAN
class=718131400-19042003>2. Using that parameter set, run the same system
over data between 1992 and 1993 as well as over the period 2002 and
2003. If the performance looks "almost" as good over those periods
(per trade, per annum, drawdown, etc.), then the system (IMO) is worth more
effort.
<SPAN
class=718131400-19042003>3. If the out-of-sample performance is not good
(definition?), I add it to my scrap heap of thousands of other rejected
systems.
<SPAN
class=718131400-19042003>
<SPAN
class=718131400-19042003>
<SPAN
class=718131400-19042003>
You
then asked about MCS. I use Monte Carlo Simulation to see what
happens when I trade a random selection of my buy/short signals. You
may recall an equity curve that I posted not too long ago. From
memory, that curve reflected the results of over 40,000 trades. The
initial capital for each trade was $10,000. I wouldn't want to trade
less than $10,000, particularly when I only like to trade round lots (multiple
of 100 shares). To take all of the signals generated by that
system would require about $10 million in capital, based on $10,000 initial
capital per trade. Probably beyond the scope of most individual
traders.
<SPAN
class=718131400-19042003>
So...
how do I reduce the number of signals so that I can afford to take every
trade. While we patiently wait for TJ to add some portfolio
management functionality to AB, I export the trades from AB to
TradeSim. TradeSim has full MCS capability.
Someone in this group posted references to some other software that does
MCS.
<SPAN
class=718131400-19042003>
In any
event, I can tell TradeSim that I only have $300,000 (or any other amount) and
it will RANDOMLY select signals that it will trade. I can tell TradeSim to
do 15,000 random selections and it will show me the average, best and worst case
equity curves for each of those 15,000 runs. What you are looking
for is a fairly consistent performance, regardless of the list of signals
accepted by TradeSim. I want to make sure you understand the process
here. TradeSim will make a purely random selecction of buy/short
signals in each run, investing up to my limit of $300,000 IBM,
MSFT, AOL, etc. might be in run number one. Any or all of those
stocks might be in run two. You can tell TradeSim whether or not to
compound your profits (yet another discussion).
<SPAN
class=718131400-19042003>
The
next step, of course, is to rank all signals by something (another discussion)
and take the signals in some sort of predetermined sequence until your system
runs out of cash. This functionality is high on the wish list for
TradeSim and somewhere on TJ's wish list for AB. Once we have
that functionality, we can see if our "smart" method of selecting which signals
to take has any value over a purely random selection. If not... the
method for selection must not be very smart.
<SPAN
class=718131400-19042003>
I hope
that I have answered your questions and concerns.
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: tchan95014
[mailto:tchan95014@xxxxxxxxx]Sent: Friday, April 18, 2003 8:04
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: [amibroker] Re:
Compounding, etc. (for Fred)Chuck,The
following is my understanding from reading your posts: you test your
system on a large universe, when you find a goog parameter set, you then
run on the same universe to pick up the candidate to trade.My
question:1) Since you do not cut off those losers in historical test from
the universe (You mentioned that a stock's characteristics can change over
time), do you still trade a certain stock when you system picks it up
but you know from you historical test this particular candidate lost
all the time? (Of course, you also mention you never check what stocks
are traded by your system, but I just want to know your thought)2)
You also mention the use of MCS, could you please elaborate on how you use
MCS to help you on system development or
whatever?ThanksThomas--- In
amibroker@xxxxxxxxxxxxxxx, "Chuck Rademacher" <chuck_rademacher@x>
wrote:> 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".> > 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.> > 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.>
> 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.> -----Original
Message-----> From: Fred
[mailto:fctonetti@xxxx]> Sent: Friday, April 18, 2003 6:16
PM> To: amibroker@xxxxxxxxxxxxxxx>
Subject: [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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