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Chuck,
I was speaking of plotting a single objective function (like Net Profit, or
CAR, or MAR, or UI, or whatever you want) as a function of 3 optimizable
parameters of your system, whatever they may be. For example, for a breakout
system, what is the effect on system profits if you vary the ATR multiplier, the
up breakout, and the down breakout? You would get multiple 3-D graphs of
profit at the 2 different breakout parameters for each ATR multiplier. I don't
know if I'm articulating this well, but that's kind of what I meant. To get a
visual picture. visit <A
href="">www.byte-research.com and look at the
3-D sample plots.
Al Venosa
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
<A title=chuck_rademacher@xxxxxxxxxx
href="">Chuck Rademacher
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Thursday, October 23, 2003 3:43
AM
Subject: RE: [amibroker] Invitation --
suggest your favorite objective function
I
don't know for sure, but I think the point about objective function was missed
completely. If you are looking at a 3-D graph, what is it
graphing? Net profit, CAR, CAR/MDD? Whatever it
is graphing is your objective function. Your objective function
could be a formula with six to eight metrics represented. Most of
the ones I use have more than four. So, using a 3-D graph
and looking for broad, flat areas is a great idea as long as you have decided
what it is that you want to graph.
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: advenosa@xxxxxxxxxxxx
[mailto:advenosa@xxxxxxxxxxxx]Sent: Wednesday, October 22, 2003
8:30 AMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE:
[amibroker] Invitation -- suggest your favorite objective
functionThere might very well be, but I don't
believe you need that to pick yourparameter values. If the peak area of
the 3-D graph is flat and broadenough, and you see no local maxima that
could have been due to chance,then any parameter you select within that
broad peak will do just as wellas any other over time. That is the
essence of robustness, and your systemought to be able to respond to
small market changes without having to beconstantly re-optimized. This
is not to say that re-optimization is not anappropriate thing to do
occasionally (and I don't know how to define theword "occasionally").
Al VenosaOriginal Message:-----------------From:
Dave Merrill dmerrill@xxxxxxxDate: Wed, 22 Oct 2003 07:27:03
-0400To: amibroker@xxxxxxxxxxxxxxxSubject: RE: [amibroker]
Invitation -- suggest your favorite objectivefunctionI
understand what you're saying, but doesn't it seem like there might
wellbe some useful numerical measure of the flatness of the 3D graph,
forexample?dave I think there is a human component
that has to be included in systemdevelopment. I am a believer in
mechanical systems from the standpoint oftrade execution. However, when
you are trying to develop your mechanicalsystem and to decide how best
to implement it, you have to make somejudgments 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 whyI sent along that figure
(just an example). You have to develop your owndecision rules that are
right for your personality, and those require you toexamine a multitude
of objective functions to aid in your decision. There isa software
package called Powerkit, wherein the developer has included 3canned
systems that the user can tweak with any combination of parametervalues
he wants to optimize. When the optimization is done, a
3-dimensionalgraph automatically appears showing how the parameters
affect profits in3-dimensional space. You pick your parameter values
based on the flatness ofthe 3-D graph, which is a measure of robustness.
TJ once told me that heplans to develop a similar 3-D graphical
capability that will blow Powerkitout of the water. That is probably on
the lower part of his priority listright now, but it will come
eventually. Is that a sufficiently vague answer to your
question? :-)) Al Venosa ----- Original
Message ----- From: Dave Merrill
To: amibroker@xxxxxxxxxxxxxxx Sent: Tuesday, October
21, 2003 8:23 PM Subject: RE: [amibroker] Invitation
-- suggest your favorite objectivefunction
that's how I've approached it in general too, eyeballing the
variousresult outputs manually. but if possible, I'd like to systematize
it, partlyso it can be an object comparison measure, and partly so it
can become apart of the trading system itself.
do you have any sense of how that might be done? it doesn't seem thatthe
example you gave boils down to simply weighting and summing the
variousindividual metrics. any other ideas,
anyone, on systematically combining them some other waythat captures
more of what we do when we eyeball?
dave I think there are numerous ways to
evaluate your system rather thanrelying on one objective function. For
example, the other day, I was doing aportfolio optimization to find out
the optimum no. of positions I shouldhave open, given a certain amount
of starting equity. I then plotted theresults of a few of the output
parameters TJ now gives us in an optimizationoutput. See attached png
file. If you were simply using one objectivefunction (CAR) without
considering anything else, you would choose 5 openpositions because
that's where CAR max'd out. However, MAR (=CAR/MDD) wasstill rising as
was UPI (you want that to be high), while UI (you want thatto 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,
theoptimum 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 lookat several different objective functions and decide on the
best strategybased on the total story they all tell. I also like to use
expectancy, whichI think is an extremely important and useful objective
function. Sorry forthe multiple answer, but I don't think there is only
one criterion uponwhich to judge a trading
system.
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