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<SPAN
class=125061001-09102003>[other reply to my questions, from Dave Chamness. -
dave merrill]
<SPAN
class=125061001-09102003>
<FONT face=Tahoma
size=2>-----Original Message-----From: David
ChamnessSubject: Re: Optimize/OverOptimize
It's OK to post my replies.
Equities may trade based on a specialist, or a
small group of frequent traders, in effect market makers. Change the group
and price behavior may change. Try to find a system for GE. You
may have better luck with a smaller stock.
Commodities are traded by many people who do not
need to make a profit, such as hedgers and governments. Currencies and
interest rates trend because Alan Greenspan does not want to look like an idiot
jacking rates up and down in a random walk. So he lowers interest rates
repeatedly until he is done.
Personally, I trade commodities, but I keep
searching for stock systems.
Dave
<BLOCKQUOTE dir=ltr
>
----- Original Message -----
<DIV
>From: <SPAN
class=125061001-09102003> dave
merrill
Subject: RE: Optimize/OverOptimize
<SPAN
class=968300905-01102003>thanks for clarifying, much appreciated. is it ok w
you if I forward your reply(ies)to the AmiBroker group where steve posted your
original? let me know.
<SPAN
class=968300905-01102003>
<SPAN
class=968300905-01102003>one area intrigues me still:
<SPAN
class=968300905-01102003>
<SPAN
class=968300905-01102003>if we do find a market where a simple rule set works
well, why would you think that's so? because of some inherent property of
the stock itself that makes it non-random, different from other issues where
that rule fails? or is it another random walk phenomenon, unlikely to persist
at all? if that's so, it seems completely pointless to trade equities at all,
no different from gambling.
<SPAN
class=968300905-01102003>
<SPAN
class=968300905-01102003>why do you think commodities act differently? because
prices respond more to real-world changes (supply/demand and factors that
influence it, etc) than to the raw emotionality that seems to drive equities?
if so, that implies we should look to fundamentals for more non-random trends
in equities, but not much in that dimension except news spikes seems to drive
valuation very much. <FONT face="Courier New" color=#0000ff
size=2>how do we resolve this apparent lack of
perceivable order, other than trading commodities instead?
<SPAN
class=968300905-01102003>
<SPAN
class=968300905-01102003>thanks again for your thoughts, very
interesting.
<SPAN
class=968300905-01102003>
<SPAN
class=968300905-01102003>Dave Merrill
<SPAN
class=968300905-01102003>
<BLOCKQUOTE dir=ltr
>
<FONT face=Arial
color=navy size=2><SPAN
><FONT
color=#000000>Answers are in the text below. Contrary to Steve's
statement, I have only one degree, BS Mechanical
Engineering.
<SPAN
>
<SPAN
>Dave
Chamness
<SPAN
>
<SPAN
>-----Original
Message-----From: Dave
Merrill [mailto:dmerrill@xxxxxxx] <SPAN
>Sent: <st1:date Month="9"
Day="29" Year="2003"><SPAN
>Monday, September 29,
2003<SPAN
> <st1:time
Hour="12" Minute="32"><SPAN
>12:32
PM<SPAN
><SPAN
>To: <A
href="">dec@xxxxxxxx<SPAN
>Subject:
Optimize/OverOptimize
<SPAN
>
<SPAN
>Dave, I
hope it's ok to contact you on this. steve karnish posted a presentation of
yours on optimization that I found very interesting, though I'm
afraid I don't get all of it. this is a topic I'm thinking about pretty
much constantly these days, with quite a bit of accompanying frustration.
IMVHO, most of the world gives way too much weight to optimizations that
seem like curve fitting to me, but I haven't figured out how to move beyond
that.
<SPAN
>
<SPAN
>a couple of
questions, if I might:
<SPAN
>
<SPAN
>- can you
explain the scatter plots on slides 3 and 4? what exactly is plotted on x
and y? the punch line, which I'm too ignorant to see, is that the system
fails with out of sample data. the one part I understand, I think, is that
the correlation coefficient, presumably between in and out of sample
results, is poor. is that right? how does the plot itself show
this?
<SPAN
>
<SPAN
><FONT
color=#000000>They show the In-Sample gain as % of perfect trading on the x
axis versus the out of sample gain on the y axis. Each data point is a
separate stock with a separate system. In sample gains were 15% of
perfect on average. Out of sample were near zero on average.
Perfect trading wins all close to close changes. There are 2 years in
and out of sample.
<SPAN
>
<SPAN
>- slide 24
mentions "Trend Following on Commodities", as "100 day lookback, trade 34%
before breakout". I don't understand what this means. something about MA or
EMA(100), maybe, but what's the 34% piece? how does it get around the
parameter settings limitations that sink other systems? is this method, or
something based on related principles, tradeable in stocks and/or
mutual funds?
<SPAN
>
<SPAN
><FONT
color=#000000>Breakout buys a new high, sells a new low. Near Breakout
trades sooner. 34% before breakout buys in the top third of the 100
day high-low range, sells in the bottom third. Specifically, the 34%
means 34% of the high-low range.
<SPAN
>
<SPAN
>- how would
I compute the daily standard deviation of the S&P500, in AmiBroker for
instance, in a way that gives the same .95%/day figure you
mention? is that the average std dev of daily close price change over
some specific period of time? I ask so I can generate comparable
figures for other markets.<SPAN
class=968300905-01102003>
<SPAN
><SPAN
class=968300905-01102003>
<SPAN
><FONT
color=#000000>Compute the standard deviation of all the close to close
changes.
<SPAN
><SPAN
class=968300905-01102003>
<SPAN
>
<SPAN
>- the
parameters I get optimizing today compensate for transient market behaviors
that will eventually end, and eventually it will do very poorly. but if
those behaviors persist, at least somewhat, for a little while, might
the system to do better than average in the short term? if so, is constant
re-optimization worth exploring, or even switching whole trading systems in
a mechanical way based on recent performance?
<SPAN
>
<SPAN
><FONT
color=#000000>I find little tendency for trading systems to work in the
future. Try to identify a simple nonrandomness. Try to find
markets that simple systems work on. Don't pick an impossible market
like S&P 500 and try to fit a complex bunch of rules to
it.
<SPAN
>
<SPAN
><FONT
color=#000000>Commodities have long term trends. Stocks show short
term 2-10 day reversals.
<SPAN
>
<SPAN
>thanks
again for writing and sharing this. makes me wish I lived somewhere
near the meetings you haunt...
<SPAN
>
<SPAN
>dave
<BLOCKQUOTE class=Section1
>
<SPAN
>Dave is an Agilent,
triple-degreed, engineer. Two weeks ago, he presented this work to
our Denver Trading Group's weekly meeting (actually, this group meets
every Thursday and most Saturday's). Once a month, I
moderate a SIG on mechanical trading (and I haven't seen less
than eighty people in the room since I've been
attending).
<SPAN
>
<SPAN
>Although, I don't agree with
certain aspects of his presentation and I somewhat object to his assigning
my name to the "Karnish System" (it has become a bastardized off-shot
of my work), I still believe that there is a lot of merit to aspects of
his work. The "Karnish System" has become the moniker for systems
(along the front range of <FONT
face=Arial size=2><SPAN
>Colorado<FONT
face=Arial size=2><SPAN
>) that stochastically
smoothes a momentum oscillator that initiates buy and sell
signals using symmetrical triggers.
<SPAN
>
<SPAN
>I neither want to endorse,
defend or criticize Dave's work...but, offer this for group members to
stimulate thought.
<SPAN
>
<SPAN
>Take
care,
<SPAN
>
<SPAN
>Steve
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