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Unlike gambling, where the outcomes are known and probabilities
constant, in trading we have a multitude of random outcomes with
undetermined probability of winning. The maximal loss is a
nondescreasing step function, with random amplitude leaps occurring
at random moments.
So, there is no real evidence to suppose that the maximal loss and
maximal drawdown achieved will persist in the future.
rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "Joe" <run_for_your_life2003@xxxx>
wrote:
> I have the same question regarding what you are refering as "sound
> theory" . The bottom line is does it make you money?
>
> --- In amibroker@xxxxxxxxxxxxxxx, "bvandyke" <bvandyke@xxxx> wrote:
> > Hi Pal,
> >
> > Can you help me understand please what you mean by selecting
> systems
> > on "sound theory", as opposed to selecting systems based on past
> > objective data regarding their profitability? Thanks.
> >
> > Bill
> >
> > --- In amibroker@xxxxxxxxxxxxxxx, "palsanand" <palsanand@xxxx>
> wrote:
> > > Hi,
> > >
> > > In my view, it is misleading to exclude individual systems
using
> > past
> > > measures of profitability like APR, Annual trades, Percent
Wins,
> > > etc., because these statistics may disprove that a system has
> > been
> > > unprofitable in the past, but cannot prove that it may be
> > profitable
> > > in the future. I would select systems based on a sound theory,
> > not
> > > arbitrary systems which has no solid theoretical foundations...
> > >
> > > rgds, Pal
> > >
> > > --- In amibroker@xxxxxxxxxxxxxxx, "MarkF2" <feierstein@xxxx>
> wrote:
> > > > 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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