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Hi Dave –
Thanks for the post.
One point I am making is that if we can
describe our decision making process, we can code that into a single objective
function. In order to automate the walkforward parameter selection
process, all alternatives must be ranked by their score on a single
formula. Flatness of the response surface is a good measure of robustness
and can be incorporated, along with profit, drawdown, and other factors, into
one formula.
And you are right on when you say the
objective function must match your personality.
Have you tried Powerkit? Do you have
the URL handy?
Howard
-----Original Message-----
From: Al Venosa
[mailto:advenosa@xxxxxxxxxxxx]
Sent: Tuesday, October 21, 2003
5:58 PM
To: amibroker@xxxxxxxxxxxxxxx
Subject: Re: [amibroker]
Invitation -- suggest your favorite objective function
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
----- Original Message -----
<span
>From:<font
size=2 face=Arial> <a
href="" title="dmerrill@xxxxxxx">Dave Merrill
To:<font size=2
face=Arial> <a
href="" title="amibroker@xxxxxxxxxxxxxxx">amibroker@xxxxxxxxxxxxxxx
Sent:<font size=2
face=Arial> Tuesday, October
21, 2003 8:23 PM
Subject:<font size=2
face=Arial> RE: [amibroker]
Invitation -- suggest your favorite objective function
<span
>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
>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
>any other ideas,
anyone, on systematically combining them some other way that captures more of
what we do when we eyeball?
<span
>dave
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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