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With regard to the discussion on "random" & tradable stocks
which has
been going on, I think some of the differences expressed may come
down to where you start from, and I would like to suggest an overall
way of approaching SOME attributes of a trading system development
under the headings below (which partly resolves getting to a good
result from any starting point(by no means do I suggest that these
criteria are the most important, rather that they need to be dealt
with at some stage in the trading system development cycle)):
ROBUSTNESS – the ability to handle broad based or random stock
selection
SEPARABILITY – the ability to identify well defined boundaries
for
selected stock "zones"
VIABILITY – the ability to withstand drawdown risk
Round 1.
Building a robust trading system might focus initially on the sorts
of rules which return good results across `randomly' selected
stock
histories from many markets. In practice one focuses on your own
favourite ZONE and does some backtesting. Will get to step 2 after
looking at the others' first step also.
A SEPARABLE (or ZONE) system (for want of a better name), might focus
on high volume stocks where you can be sure of liquidity and whose
boundaries are well defined (eg. all banks in country x).
Viability is fairly obvious and might be tackled through attention to
stops or ROI.
Round 2.
A natural 2nd step for a ROBUST starting approach would be to look at
the similarities and differences of the better performing stocks
returned from back-testing. Are they all mid-caps, banks whatever?
This screening process can lead to determining SEPARABILITY as a
trading system attribute.
A natural 2nd step for the SEPARABILITY approach is to try different
rules for each zone. Systems which are ROBUST deal with more diverse
inputs, and IMHO the variety of patterns dealt with from a random
selection of stocks is more likely to add to the ROBUSTNESS and
VIABILITY of a system which is zone focussed (highly SEPARABLE)
In either case, VIABILITY considerations come into play.
To my mind it doesn't matter that much where you start, so long
as at
some stage each of these considerations are dealt with. However, use
of time suggests picking a well-defined ZONE can be a good starting
point, providing that the other considerations follow soon after.
What I have found is that broad-based sectors, ETFs respond better to
different rules than what works for random stocks. Also, some stock
groupings (large-mid-,small-cap, or sectors respond differently to
one another).
In one case (starting out from the ROBUST perspective) Bollinger
bands & some other rules worked splendidly, until I looked more
closely and found that I was buying and selling small-cap companies
on every trade! In another case (starting out from the SEPARABLE or
ZONE perspective) I found a zone of just two stocks against the
index, but the liquidity was too low. In a 3rd case (you guessed it,
VIABILITY based)i had random buy signals and a target ROI; (actually
comparing to random buys is a good way to benchmark any system i
think, you had better do better than that)- that beat trailing stops,
but not buy and hold!
regards Gerry
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