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Test *unoptimized* system on small, mid & large cap stocks in bull,
bear & sideways market conditions, same parameters for all.
Mark: I agree up to a point.
However, I'm not convinced that a system must perform equally well across all
markets using the same parameter values, as you suggest. For example, if your
system performs admirably on the large cap stocks but not on the small cap
stocks, and within the large cap group the parameter values are robust in and of
themselves (i.e., no local maxima on the response surface diagram), why not
trade the system on large cap stocks? Also, if you optimize the same system on
small cap stocks and find the parameter values are different from the large cap
parameters but are robust, why not use those different parameters for the small
cap issues? Why do the parameter values HAVE to be the same for all market
types?
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*.
What I like to do is optimize
over a period that encompasses BOTH bullish AND bearish periods at the
same time, like 1/2/99 to 12/31/01 or 02 as opposed to selecting separate 2-year
bullish and 2-year bearish periods. Usually, systems have a short component
and a long component to them (unless you only like to trade either long or short
per se). So, optimizing the parameters in a trading period that includes
both bull and bear market action lends a certain degree of robustness in
and of itself if you find a reasonably flat response surface. Then, when you
test in the succeeding OOS period and get a reasonable performance similar to
the IS period, with no local maxima in the 3-D space of the trading diagram,
then you have a fairly robust system in my mind.
...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.
What about setting 0 commissions
just for starters when developing your system. After you have done sufficient
optimizing and forward testing, then set your commissions/slippage to your 1% or
0.5% or whatever and then see if the system crashes. If it does, trash it.
<FONT face=Arial
color=#000080>
Looking forward to your
remaining 8 posts.
<FONT face=Arial
color=#000080>
Al
Venosa
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