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Objective functions (was RE: [amibroker] Re: Optimization -- again)



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Hi,

Forward or out of sample testing is one of the few tools we have when 
system testing to avoid the dangers of curve-fitting or optimization. 
For the purposes of illustration, say we are testing a new system 
over 10,000 bars of data. Typically we'd divide this data in half; 
call the first 5,000 bars segment A and the second 5,000 bars segment 
B. We'd test the system over segment A, tweaking the parameters and 
logic until we get acceptable results, then run it over segment B. If 
the results on segment B are not acceptable, it's back to the drawing 
board and a repeat of the process: designing on A and verifying on B. 

One thought is how many times do we have to go through this very same 
process? If we're not having luck, would it make sense to reverse the 
procedure and design a B and verify on A? This way the seemingly more 
difficult data gets to speak first, and the odds of acceptable 
results on A is higher. By this thinking, we should always design on 
the more difficult data segment and verify on the easier data 
segment. 

This main approach can be brought to the next level by breaking the 
data not into just two segments, but several segments. (Assuming each 
segment remains large enough to be statistically significant.) Say 
we've broken our data into 10 equal segments, then the above process 
involves designing on all ten, but verifying or judging on only the 
worst performing three (?) segments. 

Here we are employing a "minimax" solution: we want the worst case 
results as strong as possible. But is this too strict? Perhaps there 
is some give and take involved. What weight we should put on the 
worst performing segments versus the overall performance? If the 
overall performance is very strong, can we look the other way on the 
few segments with less attractive performance? Anyway, hopefully 
these insights and questions represent constructive food for thought.

Regards,

Pal
--- In amibroker@xxxxxxxxxxxxxxx, "Dave Merrill" <dmerrill@xxxx> 
wrote:
> I'm not trying to be argumentative, honest (:-)... I'm more than a 
little
> sick of saying the same thing over and over, but I  j u s t   d o 
n ' t   g
> e t   i t .
> 
> ------------------------------
> 
> I fail to see the huge difference in principle between equity 
feedback and
> backtesting.
> 
> let's start by assuming that backtesting performance of a system 
and its
> parameters over some period of past data tells you something about 
its
> future performance. it's not a perfect predictor, but it's the best 
evidence
> we have. does this seem like a reasonable starting point? what 
alternative
> is there?
> 
> if that's true, why is it better to do it only once? what 
justification is
> there for picking one examination period over another? clearly 
market
> behavior will change continually after that. don't we need a way of 
working
> that looks at what's been happening and evolves our response?
> 
> sounds like we examine performance up to some point and adjust, 
trade with
> the best-choice system and parameters for a while, then examine and 
adjust
> again later. make sense? what alternative is there?
> 
> so then, how often do we re-examine performance history? to put it
> differently, how long do we ignore any changes in market dynamics 
that may
> or may not have occurred? why would intermittently refusing to look 
and
> respond improve system performance or reliability?
> 
> if that needs to be done, why not have the system itself do it, as 
part of
> its inherent operation? why is it better for us as an outside agent 
to
> periodically run some separate tests, reach into the internals of 
the
> system, and change stuff?
> 
> or should we just continue with the system and parameters we choose 
at the
> beginning? are they somehow more valid than what we'd choose later, 
using
> the same backtesting methods, but on a different date range of data?
> 
> ------------------------------
> 
> I realize that even if it seems to make sense logically, this all a 
complete
> crock if no systems put together like this even backtest well, 
never mind
> forward testing.
> 
> but every time I think about abandoning this line of research, it 
seems like
> the first thing I'd want to do with a new system would be (let me 
guess),
> test and possibly adjust it using data up to some date, then run 
with it for
> a while after that and see if equity growth is good. if it is, I'd 
want to
> lather, rinse and repeat with other in and out of sample data, to 
make sure
> that wasn't coincidence.
> 
> sounds way too familiar to be a completely different animal.
> 
> dave
>   From: Fred [mailto:fctonetti@x...]
> 
>   That IS what I was trying to say.  I suspect because equity feed 
back
>   is like looking in a rear view mirror, great for letting us know
>   where we were and how we could have adjusted the past to make it
>   better, but that's about it.


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