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Hi cagigas00,
There is no paradox, really. What you are looking for is commonly
called the Holy Grail (you didn't specifically ask for that, but you
want a system that doesn't cough up a hair ball now and then, and
that is the same thing). There isn't one.
Take your example (1). If the market goes down 5 percent the next
day, you think that this should cancel your previous day's long
signal. (Maybe it should, but sometimes a long signal on one issue
on a particularly bad day is a very, very, good long signal.)
But in any case, you cannot know tomorrow, much less its close, even
when tomorrow is today. At what intraday point would you decide that
today's action invalidates yesterday's signal?
I dare say you cannot.
Perhaps, by way of filters, you might know when to *abort*
yesterday's signal (taken, presumably, on today's open) by the end of
the day today. But even this much is likely only in the very short
term.
So, really, there is no paradox. In *neither* situation can you know
the future.
What you *can* know is your system's expectancy, and your capital,
and what is an intelligent risk based on both of those.
Expected holding period means a lot in conjunction with my comments.
Obviously, the longer time frames are easier to work with, but they
have more lag. Also obviously, you want to enter when there are
unexpected corrections in those longer time frames -- occurring of
course in the short term. The short term time frames have very little
lag. But they turn on a dime, and give 9.9 cents change.
Either you have a system you can trade, or you don't. It's actually
that simple. And having a system you can trade means taking the
losers with the winners, because you *know* you can stand the losers.
It means no opinion about the market. It means discipline, not
prognosticative powers or reflection, or second-guessing. You put
the orders in and let the devil take the hindmost. If your system
degrades, it will do so over a long time frame, not in a single day's
action. (I am assuming proper back testing procedure, enough sample,
enough trades, walk forward, and some stats that make you say, "I
*must* do this, in spite of the fact that I will have drawdowns once
in a while.")
If your system is good enough, you can survive the infrequent hair
balls. If it isn't, you must look for another system. You absolutely
cannot "win them all", and how to do that is really the gist of your
question. ^_^
Yuki
Tuesday, April 25, 2006, 6:16:11 PM, you wrote:
c> Hello,
c> I wanted to share my experience developing systems and there is
c> something when implementing real-life that I have noticed that you may
c> want to comment/help me on. This is causing me a headache since it is
c> a kind of paradox I need to understand. Please tell my if I am missing
c> something here:
c> When you develop a system you have 2 options.
c> 1. Use all available information for today and trade tomorrow
c> 2. Use all available information for today and trade today
c> In 1. you will be able to know today tommorrows picks (this is a great
c> advantage if you want to publish your signals) but tommorrow may be a
c> day that is not good for your system (i.e. you have a signal to go
c> long tommorrow but tommorrow the market goes down 5%). Should you take
c> the signal?. Yes you should, otherwise you are not following your
c> system. Although this is an extreme example I belive you understand
c> what I mean.
c> In 2 you are using today's information to trade today. This is good
c> because you only enter if at the moment of the trade all conditions
c> are good. My experience is that i.e. adding a PDI(14) > MDI(14) as a
c> filter to my system (no tradedelays) results improve a lot in
c> backtesting but this is not 100% real since the cross PDI-MDI
c> sometimes activate my signal instead of the intended conditions. When
c> I trade with today's information I find a lot of false signals. There
c> is a long signal, I buy, conditions change (i.e. PDI moves below MDI)
c> and the trading signal dissapears from the scan and from the chart.
c> Despite this I get much better results in backtesting even with big
c> slippage compare to 1. In real life trading I am using 2 and I am up
c> +45% for the year despite of the problems mentioned.
c> I understand that only in 1 the backtesting will provide me some
c> insight into the future, but 2 is too appealing to ignore it and I
c> have not yet seen very good systems in 1 compared to 2. I belive there
c> is no way to backtest 2 to obtain real (achivable) results since the
c> backtester ignores signals that happened during the day but were not
c> true at the close.
c> There is something in between (let's call it option 1.5) which is to
c> trade tommorrow if open > reference_price. But I have not tried this
c> yet.
c> Have you had this same experience?. What option do you use and what
c> are your results?. Any comments about this will be welcome.
c> Thanks
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