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<FONT face="Times New Roman"
color=#000000 size=3>The number of parameters in a trading system: Looking for a
Balance? Questions to the board: 1. Each
parameter introduced into a system represents a measure of control,
which limits the reliability of the outcome. The more control that is
introduced into a trading system, the less reliable the will be. In a
statistical term, you are loosing degrees of freedom. So the more
variables added like stops, logic filters and indicators (RSI,
MACD,etc) the more control you have asked and the less reliable will
be the result. This is true in general because it depends in the
cross/joint correlation between independent variables (ie:indicators).
A well designed experiment will check for possible joint correlation
among independent variables. In conclusion, the best
system approaches are the ones which use a very low
number of variables (2 to 5), if possible. The more
control parameters the more likely a pair may be
highly correlated. a. Is the above statement
correct? b. Does logic filters (buy if ..., exit if...)
limits the reliability of the outcome? c. If
yes, how can I calculate the joint correlation with a RSI and a logic
filter?
<FONT face="Times New Roman"
color=#000000 size=3> <FONT face=Batang color=#0000ff
size=2>d. <FONT face="Times New Roman"
color=#000000 size=3> what it might mean if you can get good results with a
lot of variables, which is contrary to the popular
wisdom? 2. Designing a neural
network to have a minimal degrees of freedom (DOF) is critical
when attempting to forecast financial markets. If a neural network has
too many, the model may produce excellent training results but could
generate unreliable forecasts when presented with unseen
data. a. Is the above statement correct? 3.
How much data to consider for Optimizing parameters? I think it should
be a balance between long ad short period: i)
If you take a small period you might leave a side certain
market characteristics and the optimization
might not hold in the future. ii) if you take
a long period you might overfit and little data
left to walk forward testing. With
that said I would only reoptimize the system in real trading if
results are not good let´s say in the last 4 weeks or the DrawDown
reaches a certain amount. This is a reactive trading system not a
continuously optimized system. a. What do you think of my
reasoning? b. Any comments?
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