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Hi Pal –
Sorry! Many of your earlier posts
showed good insight into model development, but I seriously disagree with
several things you say in this post.
Curve fitting means selecting a set of parameter
values that create great backtest results for the in-sample period, but are not
profitable out-of-sample.
It is perfectly valid to use different
trading systems, or even different parameter values for a single trading
system, on different tickers. To show a part of the difference between
markets, put a 5 percent ZigZag indicator on a variety of tickers and note the
time between trend changes, percentage of time in up trend versus down trend,
etc. Markets definitely Do have different personalities. And those
personalities change over time – sometimes returning to previous states,
sometimes not.
If I discover a good system to trade the
S&P futures, I will certainly not toss it aside if it performs poorly on
Soy Beans. Generalize this to any two markets. It only takes a few
good trading system / market combinations to be a winning trader. There
is no need to solve the universal market prediction problem for all markets for
all time.
To use the breakout system you mention
specifically, breakout systems used to work very well on futures; they now work
poorly on futures; they do not work at all on most stocks. Please code up
an example breakout system in afl, run it on futures data from 1970 on and on
stock data. If you find something good, report it back to us all.
Howard
-----Original Message-----
From: palsanand
[mailto:palsanand@xxxxxxxxx]
Sent: Monday, October
20, 2003 <span
>8:43 AM<font size=2
face=Tahoma>
To: amibroker@xxxxxxxxxxxxxxx
Subject: Objective functions (was
RE: [amibroker] Re: Optimization -- again)
<font size=2
face="Courier New">Hi,
In my mind,
curve fitting means either using different systems for
different
markets, or using different parameters of the same system
for
different markets, and this is not valid technical analysis.
Historical
testing via computer means feeding a set of numbers (open,
ow, close
prices), and receiving back an output set of rules that
hopefully
will make money trading. The numbers themselves do not have
names, and
the computer doesn't recognize the difference
between
'Beans' or 'Bonds'. For a system to be valid, it must work on
all numbers
tested, not just those with certain names and not others
with
different names.
If a system
works on Bonds and not on Beans, this system is curve
fitted over
a specific set of data (Bonds) and it loses all
statistical
validity. To believe it will work in the future as it has
worked in
the past is very dangerous.
Also,
different markets do not have different personalities. Again,
they are
reduced to just being a set of numbers or a bunch of
algorithms. If
a channel breakout (or any other) method is
successful,
then the same parameter must be used for all the markets,
for the same
reasons as above. You cannot use a 20-day channel in
Silver and a
40-day channel in Corn, this also falls under the crime
of curve
fitting.
I therefore
take exception to any system, that either only trades one
specific
market or group of markets, or trades different markets
using
different parameters or rules of the same system. All this
proves is what
has worked best in the past, and this will usually not
continue to
work in the future, as there is no correlation under this
scenario.
This is not
specifically written to condemn vendors. This is a
clarification
of my definitions of 'optimizing' and 'curve fitting',
and a
warning as to what types of trading systems may be valid and
what to stay
away from.
Regards,
Pal
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