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The
idea you refer to would be covered in past posts on this list, or you can
Google: TASC has some pubs on it, with the subject "Equity Feedback"
or "Trading the Equity Curve". It has been long a favorite topic for me but i
have never succeeded in making it work. It appears that an equity curve has far
less predictive value than a price chart. Probably due to built-in lag and
averaging.
herman
Herman
All interesting points and I will
work through them one at a time.
One other thought.
When running
some backtests I add a Moving Average to my Equity curve.
When the curve
falls below the MA then this corresponds to drawdowns.
Is it naive to
think then that one could:
a. run a few different systems and backtest
them on one's chosen instruments say monthly.
b. When the Equity is
above the MA, then take the signals.
c. when the equity curve falls
below its MA, then either.
i. stop trading that
system until such time as the curve goes back above the
MA.
ii. or severely reduce position
size.
iii. and/or swap over to another system that
is now above its MA.
Sort of like if the market is trending then a
trend following system would be appropriate, if the markets goes toppish,
Stage 3 or consolidates, then I would switch to a ranging type
system.
Or would there too much lag here between swapping between
trading systems?
Don't think I have the coding skills to do this with
AFL (yet), but sort of manually trade the equity curve, to reduce
drawdowns.
Or is this too
simplistic?
Regards
ChrisB
Herman van den Bergen
<psytek@xxxxxxxx> wrote:
System design should follow some logic: evaluate your "signal
strength" first.
Please know I work in the Min or smaller timeframe my experience
is limited and very one-sided. I do things "my way" and try to ignore
tradition. The only things I have learned from "other systems" are coding
techniques. You won't find the perfect system or the HG anywhere. Sorry to
burst your bubble :-) In trading you have to do your own work or work in a
group. Whichever way, to attain above average results takes hard and
innovative work. The following is jmo.
Since you may
end up testing hundreds or even thousands (yes!) of ideas you need to be
efficient. Getting drawn into advanced system concepts, fancy
stops, money management and creating fancy charts before you have
a validated the basic signals is a waste of time.
By
fiddling with all the above you increase the chance of 1) curve fitting
and 2) drawing profits from what are essentially Random signals. It is
actually possible to take random signals and add so many "shock-breakers" to
it that it becomes profitable (Tharp?). This, to me, is a totally
"non-fun" way of developing systems, all you are doing is increasing your
statistical odds to draw a little money out of the
market.
The Popularization and Commercial Exploitation
of TA encourages this approach. Looking at fancy and
colorful chart gives us ( I've been there! ) a feeling of accomplishing
something important. But are we really? Just go to your
local bookstore and browse through some books or browse the web for TA
software and you'll see what i mean. Tons of stuff out there that looks
impressive but won't make you any money.
Try to focus on what is important. The backtests I perform to
validate price patterns are:
- Exit at the Entry bar's Close (one-bar trade) or at the Next
Bar's Close (two bar trade).
- If the system
makes money I start testing intrabar exits during those two exit
bars.
- Test 1-10 minute time
frames.
- If the system looks profitable I add some code
and run a Short test.
- Run it over a watchlist, how many stocks are
profitable characterizes the system as selective or
common
- Any kind of fancy stuff, like stops and MM
"masks" the true signal performance, make it a very last
step.
I have developed some standard code modules and
placed them in my indicator space so that i can drag them onto my code
under test and to plot trade prices, signals and equity. With
this setup you can test hundreds of ideas a
day.
Always look at the equity curve and try to get as
many trades as possible - thousands if
possible. Numerical Stats don't mean a lot
since they can be distorted by a single big loss or profit. If this happens
and the equity curve is good otherwise you can study the single event
and add code to exploit, or protect against,
it.
Best regards,
herman
Herman
Your
replies and experience are appreciated.
So one could look at
placing a time stop into the system, rather than leaving this to
discretion. Previously you said: "the significance of a signal fades
quickly" : interesting thought: in designing a system then I would need to
work out my preferred time frame, expected duration of the effect of the
signal and then factor in an appropriate time stop.
It is valuable
to see "why" and "how" others' trading systems are designed,
philosophically: to see what is capable of being done, and then seeing if
there are parts of others systems or ideas that converge with one's own
ideas. Better than starting the whole learning curve from scratch and so
that is why appreciate your input and that of others in this
forum.
Long way to go
still.
Regards
ChrisB
Herman van den Bergen
<psytek@xxxxxxxx> wrote:
I simply try to trade price patterns based on a handfull of
minute bars... I expect profitable conditions to exist early in the
trade, not near the end. If a trade doesn't behave as expected soon
i feel like gambling, or trying to get lucky, and I rather get
out and wait for another opportunity.
While this may sound easy it isn't and a lot of work goes
into peripheral code to trade patterns automatically.
best regards,
herman
Herman,
thanks for the
reply.
Presumably one would have a high win ratio (% of
winners) with these short term systems, and smaller pay off
ratios?
When exits are based on price action or price targets
alone, and they do not reach the profit target, would you use a time
based stop?
If not then one could assume we could use
oscillators that will continue to oscillate and return a sell signal,
even if price does not reach the target?
Or indicators that
have a time based decay such as parabolic
SAR?
ChrisB
Herman van den Bergen
<psytek@xxxxxxxx> wrote:
Hi Chris,
Yes i like to develop short term systems: the shorter
the better, usually 1-10 minute trades. imo, The significance of a
signal fades quickly. And yes, I meant ApplyStop() type
stops where you set the position to close at a given % trade DD.
Invariably maxloss stops make me "lock in Losses" and the
price goes my way after I close the position. I don't use
complicated stops and perhaps that is the problem. I find it better
to develop system without and kind of profit/loss stops, just the
basic system working on signals only. Almost always after i have
that working adding profit stops will increase profits and adding
Max Loss stops decrease profits.
best regards,
herman
Herman
Could I trouble you to
expand on that briefly?:
by "max stop loss" I presume you
mean an initial capital protection as
per
Applystop(stoptypeloss,...,......) or similar.
or do
you mean trailing stops as in
Applystop(stoptypetrailing,...,
..., ... ?
I appreciate your systems may be shorter term,
rather than longer.
Only ask because this w/e I have been
reviewing all my trades since Jan 2004 (ASX markets, stocks, long
only, trend following) and found that it is my trailing stops
(whatever volatility parameter), that curtailed my results,
(together with emotions etc but that is another story). I might
look at locking in the stop at breakeven, then only trailing when
there is a pattern/retracement/consolidation above each successive
R-multiple profit level, starting at 3R. This would have served me
far better in the trending market we have experienced over the
last few years.
I am beginning to think that for shorter
term systems, initial Capital protection stops may prematurely
halt the cyclical nature of whatever is causing the system to
work, but need to get to grips with more coding and backtesting
skills to confim this.
Your comments would be most
appreciated.
ChrisB
Herman van den
Bergen <psytek@xxxxxxxx> wrote:
stocks have "character" some work Long and
some work short and some work both ways. Same wrt rhythmic and
other characteristics...imho there is no reason why we should
assume any characteristic to be permanent or common to a large
population.
When designing a system I try to
find similar performance for Long and Short, this gives me
more confidence that I won't go broke in a strong trend. Systems
that only work Long or Short make me nervous as I worry that
they will stop working abruptly. Sometimes, most of the time I should say... it
is necessary to adjust parameters individually for long and
short. I try to develop systems that give me thousands
of trades (minute time frame) and produce a nice smooth surfaces
on the 3D charts. I never trust systems that give me more than
one significant hotspot.
wrt indicator, I don't use any. I trade
only very short term patterns - I am a skeptic on the use of
traditional indicators. Never got any to work well - probably
because I don't have the patience (or nerve) to sit through long
trades and through major DDs.
tips? don't use any max loss stops, imho
they kill systems. Use profit stops instead. Design both Entries
and exits individually, only rarely will an entry rule give same
performance as an exit rule. The exception to this may
be high speed automated reversal trading systems (50-100
trades a day) that are in the market full
time
jmo... from a developer's viewpoint, I
enjoy development more than trading :-)
herman
I
have some nice, well-tested long systems in place. I was
surprised
when testing my discretionary systems, to find
that none of my short
signals performed nearly as well as
the long signals, in the
optimization/backtest/monte carlo
simulations.
Is this common?
In addition, I am
looking for some ideas around what indicators to use
as
the foundation for building an adequate short system. Any
ideas? I
did some searches on previous messages here, and
did not find anything
of value. General rules of thumb,
and bits of experiential wisdom, are
also welcome -- as
they apply to short systems.
Thanks in
advance,
Brian
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