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Steve,
At first, I was puzzled why you attacked me like that, but only until
I re-read Dave's original post. I missed the part of that post
explaining that the views discussed were presented by you in one of
your seminars, and thus understand why one would take my post in a
rather personal manner. Whether you did or not, does not matter. What
I wrote, and although I stand by my beliefs, was not appropriate as a
response to Dave's post. I was trying to present my views about
mistakes made by novice traders when it comes to optimization and/or
believing everything written in myriad of books available on trading.
Anyway, please accept my apologies (and apologies to Dave too, for
misunderstanding what he wanted to discuss). I meant no disrespect to
you or anyone else. That was not the intention.
As to your observation about my inability about understanding of back
and forward testing, I respectfully disagree, and would in fact love
to debate the pros and cons, but this thread is not appropriate for
that. Perhaps some other time.
Jitu
--- In amibroker@xxxxxxxxxxxxxxx, "CedarCreekTrading" <kernish@xxxx>
wrote:
> May be I'll learn something.
>
> jtelang,
>
> I doubt it...but, pay attention. I don't believe you even have a
grasp of how the credible people approach their research (of which
back and forward testing is an important part).
>
> Take care,
>
> Steve
> ----- Original Message -----
> From: jtelang
> To: amibroker@xxxxxxxxxxxxxxx
> Sent: Wednesday, October 08, 2003 8:03 PM
> Subject: [amibroker] Re: FW: Optimize/OverOptimize
>
>
> 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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