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Dave,
I think there is a human component that has to be included in system
development. I am a believer in mechanical systems from the standpoint of trade
execution. However, when you are trying to develop your mechanical system and to
decide how best to implement it, you have to make some judgments that I don't
think can easily be automated into a single, multidimensional matrix out of
which comes a simple, black and white answer. There will always be shades of
gray that require human judgment. That's why I sent along that figure (just an
example). You have to develop your own decision rules that are right for your
personality, and those require you to examine a multitude of objective functions
to aid in your decision. There is a software package called Powerkit, wherein
the developer has included 3 canned systems that the user can tweak with any
combination of parameter values he wants to optimize. When the optimization is
done, a 3-dimensional graph automatically appears showing how the parameters
affect profits in 3-dimensional space. You pick your parameter values based on
the flatness of the 3-D graph, which is a measure of robustness. TJ once told me
that he plans to develop a similar 3-D graphical capability that will
blow Powerkit out of the water. That is probably on the lower part of his
priority list right now, but it will come eventually.
Is that a sufficiently vague answer to your question? :-))
Al Venosa
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Dave Merrill
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Tuesday, October 21, 2003 8:23
PM
Subject: RE: [amibroker] Invitation --
suggest your favorite objective function
<SPAN
class=266261800-22102003>that's how I've approached it in general
too, eyeballing the various result outputs manually. but if possible, I'd
like to systematize it, partly so it can be an object comparison measure, and
partly so it can become a part of the trading system
itself.
<SPAN
class=266261800-22102003>
<SPAN
class=266261800-22102003>do you have any sense of how that might be done? it
doesn't seem that the example you gave boils down to simply weighting and
summing the various individual metrics.
<SPAN
class=266261800-22102003>
<SPAN
class=266261800-22102003>any other ideas, anyone, on systematically combining
them some other way that captures more of what we do when we
eyeball?
<SPAN
class=266261800-22102003>
<SPAN
class=266261800-22102003>dave
<BLOCKQUOTE
>
I think there are numerous ways to evaluate your system rather than
relying on one objective function. For example, the other day, I was doing a
portfolio optimization to find out the optimum no. of positions I should
have open, given a certain amount of starting equity. I then plotted the
results of a few of the output parameters TJ now gives us in an optimization
output. See attached png file. If you were simply using one objective
function (CAR) without considering anything else, you would choose 5 open
positions because that's where CAR max'd out. However, MAR (=CAR/MDD) was
still rising as was UPI (you want that to be high), while UI (you want that
to be low) was still falling and RAR/MDD was still not max'd out yet. So,
when you look at 7 open positions, you see that UI had pretty much bottomed,
UPI, RAR/MDD, and MAR had finally topped. So, in this particular case, the
optimum no. of open positions would be selected to be 7, in my opinion,
rather than 5. So, using this tiny little example, I think you need to look
at several different objective functions and decide on the best strategy
based on the total story they all tell. I also like to use expectancy, which
I think is an extremely important and useful objective function. Sorry for
the multiple answer, but I don't think there is only one criterion upon
which to judge a trading system.
Al Venosa
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