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This is in response to DT's and others' requests to provide more
details on my 9 robustness criteria.
First some administrative anouncements, lol. I've decided to provide
them one-by-one, first due to my time constraints, second because I
feel that's the best way to discuss them and third because I want to
see how this goes. I welcome all constructive debate, especially
opposing views supported by quantitative analysis. But if this
degenerates into a flame war, I've got better things to do with my
time. Treat me with respect and I'll treat you with respect. There
seems to be a lot of interest in this topic, so let's please have a
collegial and productive discussion. This is post 1 of 9 (not
counting the dialog inbetween, let's see how far we can get :-).
Why care about robustness? For whatever reasons, markets change. We
could spin our wheels forever discussing time series theory, serial
dependencies, random walk, nonstationarity, etc., like academicians
do and get nowhere (as they do), or we can try to cut through the crap
and deal with it (the simple fact that markets constantly change).
My weapon of choice is robustness. You could say I have a robustness
obsession and my criteria are overkill. But that's my choice and
you're free to make your own on how far you want to take this, if at
all.
OK, I lied. There will be some, very light discussion of statistics
because some criteria are steeped in statistical theory. But most
can be reduced to simple, mechanical procedures that can be graphed in
a spreadsheet and visually and intuitively interpreted. Others
require simulation software and one requires proprietary software but
we'll cross that bridge when we come to it.
Speaking of proprietary, there are some things I simply won't
disclose, such as specific parameters for certain criteria. So please
respect my wishes and don't ask. I have my reasons. So evaluate this
on your own and decide for yourself what place, if any, the criteria
have in your trading. They work great for me but I make no claim that
they're the Holy Grail of robustness and am sure that some of you will
come up with better ideas if there's enough interest and discussion.
With that long winded intro, here's Criterion #1:
Test *unoptimized* system on small, mid & large cap stocks in bull,
bear & sideways market conditions, same parameters for all. I use
the stocks of the S&P 600, 400, and 500 indices and 2 year bull, bear
and sideways periods (for a total of 6 years per stock). Rationale
behind this: to find systems that profitably *tested out in the past*
on a large number of (somewhat tradeable) stocks of varying market
caps in multiple sectors under different market conditions, under the
assumption that this indicates the system is robust enough to
profitably *trade select issues in the future*. More on robust issue
selection in later criteria. Looking for net profitability on all mkt
cap and mkt condition subtests, and profitable on the majority (>
50%) of issues in each subtest, the more the better. Sometimes I cut
a system some slack if it's close on one or two subtests, it's a
judgement call. My commission setting(s) in AB: proprietary, based
on my *slippage* research using data from actual trades. But you
could choose an arbitrary say, 1% to get started. Date settings for
my 2 year intervals: proprietary but you can easily find your own by
eyeballing a chart of a major index. Just use the same ones each
time so you compare apples to apples. My lite version of this is 2
year bull and bear periods on the ND100 and SP100 stocks, which I
sometimes run as a quick pre-screen. Next time someone posts a system,
run it through the lite or full version. Or test the systems in the
AFL library. The more systems you run through, the more intuitive of
a feel for robustness you'll get. Note that I'm *not* saying you
shouldn't or can't successfully trade something that doesn't meet
this standard, lol. That's obviously not true! I was asked to
explain my robustness criteria and that's what I'm doing. Period.
This criterion is a post-Amibroker creation, BTW. Pre-Amibroker I had
a small test portfolio of diverse issues I used instead and it did a
decent job. I run this now because I now (easily) can, *many* thanks
to Tomasz. If you're thinking, geez, why bother with this, ask
yourself a simple question. *All else being equal*, would you feel
more confident trading (with your money) a system that passes this
test or one that fails it?
Regards,
Mark
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