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Steve,
As you are probably aware....but for others on the
list.
The first stage in the development of a trading
system is its design. This involves the development of a trading idea and
then its implementation in some testable design. The second stage in this
process is the preliminary testing of the trading model.
Testing comprises four main steps.
1. Verify that all the formulas and rules are being
calculated as intended.
2. Asses whether the combinations of formulas and
rules function as the theory would indicate.
3. Develop a preliminary idea of
profitability.
4. Develop a preliminary idea of
robustness.
Robustness is an
important idea in trading model testing. The Webster's University dictionary
provides the following definition: Robust : Powerfully
built : Sturdy.
The key word is " Sturdy". In other words, a robust
trading model is tough and long lasting. For our purposes, a robust trading
model may be identified by three characteristics:
1. Profit over a wide range of
variables.
2. Profit over a wide range of
markets.
3. Profit over a wide range of market types and
conditions.
In other words, a robust model will continue to
perform profitably when markets change. Since markets change constantly, the
more robust the model, the better.
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
<A title=kernish@xxxxxxxxxxx
href="">CedarCreekTrading
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Friday, October 31, 2003 4:12
PM
Subject: Re: [amibroker]
Robustivity
Dave,
Quite honestly, I haven't heard any definitions
of robust at this forum. Lot's of folks are willing to say: "This
is not robust...", but I have asked for specifics and definitions and nobody
is supplying the answers. The system and how it's traded is not the
issue. This is exactly why I decided to present the CMO5 on ETF's.
The concept isn't new and the data is OOS. Without any tweaking or
modification, the approach continues to produce a reasonable equity
line.
Would you like for me to comment on the deviation
of the equity from a chosen linear regression? Fred mentioned it would
be nice to see an equity curve (and there is one on each chart that I sent)
and that should count for one of Mark's nine robust measures.
Since, I'm not bright enough to even guess at
nine measures of robustness (and so far, Mark hasn't shared), I must rely on
simple bench marks: how does it perform over 8,000 issues, how does it
perform in different markets (futures, equities, ETF's), how does it perform
in different time periods, max eod dd's, max neg. excursions, avg. win/avg.
loss, expectancy, blah, blah, blah.
Did I miss something or did someone actually
define robust? If so, I hope it was better than the optimizing
thread. Testing is necessary, optimizing is a spiraling death trap
(unless you name has DT as initials...then you understand the trap and play
the game on the edges of the black hole).
The CMO5 is a dandy indicator and the rules that
I apply to trigger the trades are simplistic. Certainly, anyone
with decent software can better the results (well, maybe). The trick is
to modify the approach ... without over-optimizing (tough trick).
If over the next six months, this system, with
it's defined triggers, trades the DIA, QQQ, and SPY with decent profits...is
it robust? How many years must it continue to produce steady results
before it can be called robust? If we look back ten years from now, and
it has performed as it has in the last four years, is that robust? Must
it also show the same kind of results in silver, bonds and soybeans? If
it performs on EOD, data ... must it also knock em dead in one minute time
frames?
Here's a different view: If a system
performs OOS for a period (x) of time and continues to perform into the
future, without adjustments...then I hereby declare that it is robust.
Why? Because, just like technical analysis: every input, that can
be considered, is discounted by an issue's price. In technical analysis,
we discount all the information that flows in, out and around a stock and only
consider the price. So, why not just judge a issue's robustness by
strictly pegging it to OOS results? Period. If these ETF's
continue to produce steady results for the next five years, I expect someone
to say: "Well, maybe these ETF's with the CMO5 performed well for
the past eight years, but by my definition, this is not
robust".
I'm still waiting for the naysayers to define
robust and to post a system that can be monitored for results. The CMO5
is the default indicator that I use to demonstrate the character of momentum
oscillators. Many of us have come to realize that the indicator is not
the most important piece of the puzzle. The grail is not a silver or
gold chalice.
Robust and optimizing are difficult terms to
define. Any definition can be argued. Robust is like beauty.
My wife is beautiful (my subjective opinion). You might find her
unattractive.
The real silly part is that people want to argue
whether something is robust or not. The rubber meets the road when you
trade. Try flipping around sizeable accounts with something that is not
robust... money flies away.
Sorry that I haven't been able to answer your
question. Why don't you direct you question to Mark. He has a nine
point plan to evaluate what is or is not robust. Is there a possibility
that one might over-optimize robustness?
Take care,
Steve
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Dave Merrill
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Friday, October 31, 2003 12:33
PM
Subject: RE: [amibroker]
Robustivity
<SPAN
class=093340919-31102003>thanks for the specifics, glad to have 'em, even
though that's not what I was trying to ask (:-)
<SPAN
class=093340919-31102003>
<SPAN
class=093340919-31102003>what I'm most interested in isn't the system
itself, but what you did to convince yourself that it's robust. the way it
was posted implied that you disagreed with other ideas of robust-ness/ivity
floating around here, so I'm trying to find out what your approach
is.
<SPAN
class=093340919-31102003>
<SPAN
class=093340919-31102003>dave
<SPAN
class=093340919-31102003>
<BLOCKQUOTE
>
If I am using the CMO5 with triggers
of 34/-34, I would go back and start a test to evaluate this system and
triggers. The starting period would be whatever date you pick
(1990, '97, 2000, etc.).
Next, I run the test over 315 trading
days (this period gives me results for approximately one year..it takes
"x" amount of periods to load the TRIX(21), which I use as a trend
identifier. My approach produces about 10 to 15 round turn trades a
year... in each stock.
I then rank all issues by one
criteria: percent return per day (while the money is in the
market). If you only consider the percent per day contributions, I
think you will find that all other "book learned" ratios come out just
fine. Numbers lie. Would you rather trade a $100 stock that
returns $20 or a $20 stock that returns $10? Percent per goes a long
way to normalizing the comparisons.
I pick the 20 best percent per day
stocks and trade them for the next quarter. At the end of the
quarter, I reevaluate the percentage per day contributions and reshuffle
the issues in play, if necessary.
Symtems don't go bad, stocks and
commodities go bad. Going bad is best defined by a change in the
pattern of supply and demand. The cream rises to the top of the
list.
Is this optimizing? Could be,
by some definitions. If all the odds are even money, who would you
prefer to bet on: Chicago or Kansas City? KC is undefeated and
Chicago couldn't beat the local high school. My money is on
KC.
The stock betting setup is not
handicapped (like almost all games). This is basically a even money
play (with subtractions for commission and
slippage...juice/vigorish). If you have 9,000 issues to play, why
won't someone want to bet on the strongest performance?
I know that the explanation might be
over simplified...but, the people who know me, in and out of this forum,
know that this is the way I do it. I'm not crusading for
anything. This works. I've presented this simplistic approach
publicly to large groups and in a number of internet seminars. It
continues to crank out extraordinary profits.
Please let me know if the
paragraphs help to explain the ranking.
Take care,
Steve
----- Original Message -----
<BLOCKQUOTE
>
<DIV
>From:
Dave
Merrill
To: <A
title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Friday, October 31, 2003 9:29
AM
Subject: RE: [amibroker]
Robustivity
<SPAN
class=496400216-31102003>steve, thanks for your
response.
<SPAN
class=496400216-31102003>
<SPAN
class=496400216-31102003>from your msg subject and the way you presented
this system, I thought you were offering it as an example of one
you had objectively evaluated and determined to be robust. I
was interested in how you thought "robustivity" should be evaluated,
since you seemed to be contrasting your approach to walkforward
optimization and the various other system measures people were talking
about.
<SPAN
class=496400216-31102003>
<SPAN
class=496400216-31102003>what I'm hearing in your response below isn't
what I would describe as a specific method for distinguishing
accidentally gorgeous backtest results from robustness. you do mention
testing also at faster time frames, which isn't a technique that's been
mentioned recently. but mostly, the robustness label here seems to come
from your integration of various aspects of your long experience with
it, like your visual sense of how it behaves. am I missing
something?
<SPAN
class=496400216-31102003>
<SPAN
class=496400216-31102003>another question: you mention issue selection,
the idea of looking for stocks you think will trade well with a
particular indicator, rather than the other way around. how do you do
that? by measuring raw past growth trading that indicator? other
measures?
<SPAN
class=496400216-31102003>
<SPAN
class=496400216-31102003>thanks again,
<SPAN
class=496400216-31102003>
<SPAN
class=496400216-31102003>dave
<BLOCKQUOTE
>
<FONT face="Courier New"
color=#0000ff size=2>just for my understanding, in what sense is this
system "robust"?
<FONT face="Courier New"
color=#0000ff size=2>
Well,
first, this was presented to the public in the late 90's, at a series
of seminars that I conducted for Equis. Same indicator, same
triggers, same everything. This robust "thing" is a tough one to
define. I'll try to explain what's important to me, but, it's
very subjective and just one person's opinion.
<FONT face=Arial
size=2>
<FONT face="Courier New"
color=#0000ff size=2>is it because
results are similar with different similar periods and
thresholds?
<FONT face=Arial
size=2>
If you
take this CMO5 indicator and step down in time (5, 10, 60
minutes), you need to widen the triggers to obtain decent
results. Other than that, it trades through time-zones with
very good results.
<FONT face=Arial
size=2>
<FONT face="Courier New"
color=#0000ff size=2>that seems unlikely, since there isn't very far
to go from 5 to hit 1 and 0, which I'd guess are significantly
different. what sort of testing led you to decide on this period and
threshold, and this system for that matter?
<FONT face=Arial
size=2>
If you're
referring to the CMO5...I first started testing it six years
ago. I've tested and eyeballed every version of CMO(x).
I've created a few indicators that combines different periods of the
CMO. For my money, for my style, this judge of momentum trades
more things, more accurately than any other indicator I am aware
of. As I have begged many times: give me something
better...I'll use it instead of this.
<FONT face=Arial
size=2>
<FONT face="Courier New"
color=#0000ff size=2>is it robust
because it works well on many stocks, indexes and funds over a long
period of time?
<FONT face="Courier New"
color=#0000ff size=2><SPAN
class=468263723-30102003>
Yes, it
works well on many stocks and indexes. I don't trade funds, but,
some fund managers, DTG members, use versions of the CMO to aid their
timing.
<FONT face=Arial
size=2>
<SPAN
class=468263723-30102003><FONT face="Courier New" color=#0000ff
size=2>because of the concepts behind the indicator
itself?
<SPAN
class=468263723-30102003><FONT face="Courier New" color=#0000ff
size=2>
<SPAN
class=468263723-30102003>I process
visually. The math is beyond me. My bottom line has always
been the same: give me an indicator that is smooth, yet
sensitive to intermediate and major market turns. After gawking
hundreds of charts, everyday, for the last six years, I'm amazed at
how this indicator quantifies momentum. I like versions of the
Stochastic RSI and the Standard Error Oscillator, but dollar for
dollar, the CMO does it for me.
<SPAN
class=468263723-30102003><FONT face=Arial
size=2>
<SPAN
class=468263723-30102003><FONT face="Courier New" color=#0000ff
size=2>something
else?
<SPAN
class=468263723-30102003><FONT face="Courier New" color=#0000ff
size=2><SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>I think there's a few other things to
mention. First of all, the ETF's that I showed were chosen
because they represent a broad range of stocks and are popular trading
instruments. Do I suggest trading these issues with this
system? No way. The CMO5 trades a lot of other issues with
better results than the ETF's. I always allow the issues "to
pick themselves". Trade the issues that return the greatest
percentages in a stable system.
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>In it's stripped down version, as presented,
the CMO5 is an indicator that can return steady profits (see equity
lines) in it's rawest unoptimized form. Is that robust?
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>Robustness and optimizing/over-optimizing are
fascinating and misunderstood subjects. Over the years, I've
constantly simplified my approaches. I can improve on the
results of the three ETF's by simply "tweaking" the trigger
levels. But, will it walk forward better than the default
triggers of 34/-34? At least what I presented was out of
sample.
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>If an approach does a good job of
identifying movement of supply and demand, the approach should not be
expected to work on all issues. To say a system needs to
work on all issues is total crap. To say
that a system sucks because it doesn't work on XYZ is another large
pile. Build simple things and concentrate on issue
selection.
<SPAN
class=468263723-30102003><SPAN
class=468263723-30102003>
<FONT face=Arial
size=2>Optimization leads to dark and spooky places. Ranking
leads you down the yellow brick road.
<FONT face=Arial
size=2>
Take
care,
<FONT face=Arial
size=2>
<FONT face=Arial
size=2>Steve
<FONT face=Arial
size=2>
<BLOCKQUOTE
>
<SPAN
class=468263723-30102003>steve, thanks for sharing this
(again).
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>just for my understanding, in what sense is
this system "robust"?
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>is it because results are similar with
different similar periods and thresholds? that seems unlikely, since
there isn't very far to go from 5 to hit 1 and 0, which I'd guess
are significantly different. what sort of testing led you to decide
on this period and threshold, and this system for that
matter?
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>is it robust because it works well on many
stocks, indexes and funds over a long period of time?
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>because of the concepts behind the
indicator itself?
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>something else?
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>I'm not disputing the system's value, which
I haven't tested yet. I'm trying to understand what kind of process
you go through to settle on a system and
settings.
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>thanks,
<SPAN
class=468263723-30102003>
<SPAN
class=468263723-30102003>dave
<SPAN
class=468263723-30102003>
<BLOCKQUOTE
>
1. This exact system was
presented over a year ago at this forum
2. The charts are OOS (since,
it's been posted publicly forever)
3. Rules are simple: Buy
the opening of the next day when the CMO5 closes below -34 and
sell when it triggers above 34.
Works on most issues (raw).
Works better if:
a. You take trades only with
the trend
b. You protect yourself from
large drawdowns (stop)
c. You conjure a profit target
(limit)
d. You put in a time stop
This is the guts of an indicator and
a logical systematic approach. Whistles and bells are
optional (but, in my opinion necessary). Again, if you start
with a pig, the prom dress doesn't make it look any better.
Don't hang ornaments on a twisted Christmas
tree.Send
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