[amibroker] Statistics

["Howard Bandy" <howardbandy@xxxxxxxxx>]

Greetings all --

Thanks to all who are making the R package accessible from within
AmiBroker. I plan on using it, and I'm sure others will as well. 

This posting is a word of caution about the use of statistics in
trading system development.

I see two major areas of application:

1. Monitoring the results of real trades and using statistics to
determine whether the model (the AFL) of the system is out of sync
with the data.  This is certainly a legitimate application.

2. Using statistical methods to analyze the price series, searching
for potentially profitable patterns.  Be aware that the results of the
search are in-sample.  Data mining results are always in-sample.  And
data mining results are very prone to being over-fit to the data.  It
is extremely important that enough data be reserved for out-of-sample
testing to determine whether the patterns found represent a usable
signal, or whether they are either lucky or fit to the noise.  

Those of you who have read Quantitative Trading Systems will recall
two examples where data mining found what appeared to be reasonable
trading signals.  In both cases, there were over one million closed
trades in the in-sample period.  And in both cases, the system was not
profitable out-of-sample.  

In any event, no matter how promising the statistics look, in order to
trade the signals, they must be written into AFL and run as a trading
system.  That gives an opportunity to look at the signals and their
results -- equity growth, holding periods, drawdowns, portfolio
applications, and so forth.  If there has been no hold-out period when
performing the data mining, then there is no out-of-sample period for
the trading system.

Please be careful.  It is very easy to fool ourselves when data mining.

Thanks for listening,
Howard



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