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Dave, if this thread goes on for ever, YOU will be the one to
blame. :-) Here! I'll help you completely open the can of worms that
you're attempting to open. :-P
IMO, most, but not all, attempts to optimize are based on flawed
logic. I'll present myself as an example, which should rhyme with
most novice traders. A typical wanna-be trader reads Dr. Elder's
book. Then he/she tries to implement it. Of course, Dr. Elder, like
many other "experts", never offers a completely working system,
although the book offers, like many other books, good concepts well
understood by practically reading any other trading related book if
you have even half the brains of what it'd take for you to survive in
this jungle. Instead, just concepts. Now here, substitute YOUR
favorite book for Dr. Elder's book. Same thing applies.
So its upto me, an average person, to derive a profitable system from
his concepts. Hmmm... What are the odds of that happening? After all,
HE had to resort to selling stuff to other traders to make a living
himself. Call me fanatically skeptical, but I find it funny how that
works.
Now, you are thinking... What does this have to do with optimization?
It does, a lot. Because optimization, IMHO, is an attempt to make an
unproven logic work with the past data you have. Read that definition
again. That's all it is. At least, its a good thing that the base
concept is not "completely" random, if you read a book or two. But
nonetheless, its true. You start with a concept that you "think" will
work, then it doesn't, then you tweak it a little bit, it still
doesn't work, and then you finally turn to the software to tweak it
to death to make it work with the past data, a la optimization.
Think about it this way, if someone could become the greatest stock
trader just by optimizing a concept on the past data, wouldn't we
have heard about him/her by this time? That itself should answer your
original question.
IMHO, one should have a "sound" strategy in the first place. A sound
strategy should take into account ALL factors that the great traders
of the past have known to take into consideration. Bounce it around a
few people, if you're not sure that its sound. And THEN you can
optimize it a LITTLE BIT, and THAT is ok.
All of this of course, is IMHO, a novice trader. I'm all for getting
flamed by someone who is actually making tons of money just by
optimizing an original strategy that didn't work prior to the
optimization. May be I'll learn something.
And if not ualready nderstood, no offense meant to ANYONE. Neither
people who optimize, nor people who are fans of Dr. Elder. Direct all
flames at Dave. :-)
Jitu
PS: A family emergency will prevent me from replying to this for
couple of days, but I will follow it up as soon as I get a chance.
--- In amibroker@xxxxxxxxxxxxxxx, "Dave Merrill" <dmerrill@xxxx>
wrote:
> [other reply to my questions, from Dave Chamness. - dave merrill]
>
> -----Original Message-----
> From: David Chamness
> Subject: 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
> ----- Original Message -----
> From: dave merrill
> Subject: RE: Optimize/OverOptimize
>
>
> 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.
>
> one area intrigues me still:
>
> 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.
>
> 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. how do we resolve this apparent lack of
perceivable
> order, other than trading commodities instead?
>
> thanks again for your thoughts, very interesting.
>
> Dave Merrill
>
> Answers are in the text below. Contrary to Steve's statement,
I have
> only one degree, BS Mechanical Engineering.
>
> Dave Chamness
>
> -----Original Message-----
> From: Dave Merrill [mailto:dmerrill@x...]
> Sent: Monday, September 29, 2003 12:32 PM
> To: dec@xxxx
> Subject: Optimize/OverOptimize
>
>
>
> 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.
>
>
>
> a couple of questions, if I might:
>
>
>
> - 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?
>
>
>
> 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.
>
>
>
> - 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?
>
>
>
> 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.
>
>
>
> - 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.
>
>
>
> Compute the standard deviation of all the close to close
changes.
>
>
>
>
> - 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?
>
>
>
> 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.
>
>
>
> Commodities have long term trends. Stocks show short term 2-10
day
> reversals.
>
>
>
> thanks again for writing and sharing this. makes me wish I lived
> somewhere near the meetings you haunt...
>
>
>
> dave
>
> 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).
>
>
>
> 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 Colorado) that
stochastically
> smoothes a momentum oscillator that initiates buy and sell signals
using
> symmetrical triggers.
>
>
>
> I neither want to endorse, defend or criticize Dave's
work...but,
> offer this for group members to stimulate thought.
>
>
>
> Take care,
>
>
>
> Steve
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