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Re: [amibroker] Re: FW: Optimize/OverOptimize



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Jitu,
 
I apologize if I offended you.  I 
pulled up your orginal email and I'll try to be more specific with my 
points:A typical wanna-be trader reads Dr. 
Elder's book. 
 
*Maybe, but, I don't think that's the typical 
path.  
 
Then he/she tries to implement it. 
 
*Sounds dirty or dangerous.
 
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.
 
*Amen Brother!!  This research 
and trading is bitch. I'm in that "half the brains" category and it's twice 
difficult for the half-witted.
So its upto me, an average person, to 
derive a profitable system from his concepts. 
 
*I think you are on to 
something.   
 
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.
 
*That Dr. Ehler must be some 
type of Jimmy Jones. Are you saying that there might be people who market 
useless garbage to the public?  Please Jitu, don't drink the 
kool-aid.  
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. 

 
*Some of us actually start 
with proven logic.  How many weeks, months or years does 
it take for logic to be "proven"?  There many traders and some products 
that can prove their logic and guess what?  They've done it publically for 
long,long periods of time.  Maybe, you're turning over the wrong 
rocks.  "Looking for love/luck in all the wrong places".  People have 
things that work.  Many of these people share.  

<FONT 
face="Courier New" size=2> 
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.
 
*I think you have a tweaking 
problem...I can refer you to a good doctor in Eagle County.  I just 
recovered from West Nile Virus.  That doesn't make me an expert on 
diseases, but, I believe you have "tweakitis".  The smarter they are...the 
harder they tweak.  Some say:  "Don't tweak a little, because pretty 
soon you'll have to tweak every day!" <FONT 
face="Courier New" size=2>I don't believe that part.  Every so 
often, I like to tweak-it-up.  
 
Are you tweaking 
multiple variables inside your algorhythm or are you optimizationing 
triggers, stops, targets, filters, qualifiers and/or other 
"goodies".   Remember the old saying:  "You can dress a pig in a 
prom dress, but in the end...it's still a pig".  If you start with a 
concept that doesn't work (across broad parameters) you have yourself a 
pig.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.
 
*<FONT 
face="Courier New">We have heard.  Most of the great 
stock/commodity traders are not interested in a high profile. John 
Henry owns the Boston Red Sox...so, I guess that is high profile.  Twenty 
years ago, he wouldn't even let me see what type of computers he was 
using.  I bet he is still very hush-hush.  It takes finding out 
who/what works.  Finding out what works is 
work. 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.
 
*As Keith Fitchen, 
the inventor of Aberration, likes to say and, I'm paraphrasing: "These book 
writers and system developers are drinking each others bath water".  I 
couldn't agree more.  I suggest that if your not sure that your 
approach is sound, that you don't even bother to "Bounce".  Optimizing 
is dope for system developers.  Always remember to use drugs 
responsibly.
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. 
 
*Why would someone want to start 
with a strategy that doesn't work?
 
 
May be I'll learn something.
 
*That's the 
spirit!
And if not ualready nderstood, no offense 
meant to ANYONE. Neither people who optimize, nor people who are fans of Dr. 
Elder. 
 
*No offense 
taken.  Poor Dr. Elder.  First a Messiah, then scorned and flamed 
in forums across the world.  The shame of it all.  I'm trying 
to sell the story to Hollywood. Very sad.  

<FONT 
size=2> 
<FONT 
face="Courier New">I'm in the "people who like to optimize" 
category...but, I'm mostly a recovering "person who used to like to 
optimize".  Once, I over-optimized so hard...I almost 
died.   No kidding, it almost killed me.  So, obviously, you have 
to be really careful.   It can be deadly.  First, you do a little 
tweak here and a little tweak there and pretty soon you're a tweaking 
fool.  Suddenly, there's this ever growing need to "do a little 
tweaking"("on the tweak", "tweakin'", "doin' the tweak", "tweakarama", "tweaky 
deaky"...etc.). Bless me father, for I have tweaked. Welcome 
to tweaksville.  
 
Direct all 
flames at Dave. :-)
 
*Flames don't bother Dave, the Ft. 
Collins group will pour beer on him.  
 
<FONT 
face="Courier New">**Jitu, sorry I offended you.  Optimizing is a 
heavy subject.  I can understand your frustration.  Dave did a good 
job with the presentation and yes, he and people around him (using totally 
different approaches) make money trading mechanical systems.  These guys 
are "Crunch Monsters" and are powered up.  Guess what?  Dave 
gives a good optimizing seminar because he's also a recovering 
"tweaker".  
Jitu
<BLOCKQUOTE 
>
  ----- Original Message ----- 
  <DIV 
  >From: 
  jtelang 
  To: <A title=amibroker@xxxxxxxxxxxxxxx 
  href="">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. :-PIMO, 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. 
  :-)JituPS: 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@xxxx]>     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,> > 
  > >       SteveSend 
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