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Phsst said:
I've read this post more than once and on more than one occasion decided to ignore it since I have not had anything to contribute to your query.
But I keep coming back to it because it strikes me as a curiousity.
Like you indicated, in the past I've filtered based upon price range, (particularly on Shorts), but I've not yet found a situation where it paid to filter on price. And now that you have enlightned me about split-adjusted prices of the past, I've even stopped filtering
adjusted Short prices, preferring to use raw data filters instead.
If it doesn't compromise your fiduciary responsibilities, could you elaborate on the significance of price filtering in your backtested trading systems?
My reply:
Thanks for replying and for giving me another chance to spell out what I'm trying to achieve. You should see the answers to this posting that I received at the Holy Grail site. Yikes!!
I have a system, not too unlike one that you and I previously discussed. Amongst all the other things that it is doing, it is filtering such that it is only interested in stocks between $3 and $10.
Why does it want stocks in this range? I have a few theories, but the important thing is that if I give it any other range, it doesn't do as well.
So, my question was "Does the system want low-priced stocks or does it want stocks very specifically in the $3 to $10 range?".
Can you see the subtle difference there? In order to better demonstrate what I'm talking about, let me ask you to tell me the price of a high-priced stock in early 2000? You may say something like $200. If I ask you to tell me the price of a high-priced stock last week, you might say something like $80. Why the difference? Because the whole market is priced differently today than it was in early 2000.
So, back to my original question. Does my system want to trade cheap stocks or stocks between $3 and $10. As it turns out, the system performed better in early 2000 if I raise that range to $8 to $15. So, this would suggest to me that the system wants to trade cheap stocks, adjusted dynamically to overall market pricing.
In case it hasn't come through in everything that I've ever talked about, I want my systems to be presented with all stocks in all timeframes and I want my systems to make the necessary adjustments so that they will trade well under any conditions.
As you know, I adjust my volume/turnover filters according to the average volume/turnover of the market over time. If I have a price range filter, why shouldn't that be adjusted dynamically too? If it should be adjusted, how should it be adjusted? I was asking for ideas on how to make such an adjustment.
While waiting for replies, I tried over 80 different methods of adjusting the price range. The best method so far is to adjust it based on the standard deviation from the average price. I tested this on all active and de-listed stocks back to 1960.
By making this adjustment, the system in question has:
1. A smoother equity line.
2. More consistent annual profit (all years with similar returns).
3. Higher CAR and lower MaxDD.
Is it more curve fit or is it adjusting to market dynamics? I think it is the later and I realise that there are those who will think it is the former.
The logic is staying in!!
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