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Howard,
I might move to MediaFire completely .. they are free and 'permanent'
but the ads are terrible.
With Rapidshare I will have to pay for some space to keep the files
longer than 90 days but it is ad free.
Haven't decided.
Two files for you to try are at MF..... the PDF should give you a
quick test of the download.
Refer to Mirror Site links:
http://zboard.wordpress.com/downloads/
Future:
- may upload the stress test files
- I have a math method in mind to bypass the number crunching
- the math formula would make it pretty easy to do in AFL except it
needs a trade array (workarounds possible with current AB version I
guess)
- part 2 files explore sample error/variance (if they are going
somewhere I will post on that ... I recall I did find some
interesting relationships in error propogation but I haven't looked
at it for a couple of years)
Let me know if you can't download from mediafire
OR if you can recommend a good filesharing site
brian
--- In amibroker@xxxxxxxxxxxxxxx, "brian_z111" <brian_z111@xxx> wrote:
>
> The BS file is too big for Yahoo group files ... also it would clog
> up limited space.
>
> I thought about AB third party but I have to download/maintain
third
> party software to FTP upload.... that annoys me somewhat (I am a
very
> independent type).
>
> The Zboard/WordPress arrangement is a trial ... if it goes smoothly
I
> will keep it going for a while.
>
> I am happy with the WordPress (limited filetype/space) arrangement,
> with a file host for sharing.
>
> So, now I will consider other filesharing hosts.
>
> Anyone you can download from?
>
> I can put one somewhere else for you.
>
>
> Don't worry I will make sure you get one, way or another.
>
> Better to get another host though because there will be at least
one
> more big file ..... if I keep going there might be plugins one day
so
> I need a universal host.
>
>
> brian_z111
>
> Zboard.wordpress.com
>
>
>
> --- In amibroker@xxxxxxxxxxxxxxx, Howard B <howardbandy@> wrote:
> >
> > Hi Brian --
> >
> > I use a Hughes satellite connection to the Internet. It seems
that
> Hughes
> > appears to Rapidshare as a single user (which is always over its
> limit), so
> > I am never able to download a Rapidshare file. If possible,
could
> you
> > upload the files to the Yahoo AmiBroker file section?
> >
> > Thanks,
> > Howard
> >
> >
> > On Sat, Feb 7, 2009 at 9:10 PM, brian_z111 <brian_z111@> wrote:
> >
> > > I am using Rapidshare for file sharing.
> > >
> > > Free downloads are available but they are slower than paid
> download
> > > and limited to 1 download per time ... wait a while and you can
> > > download again (still good value for my customers).
> > >
> > >
http://rapidshare.com/files/195190948/BinomialMaster_ABVersion.xls
> > >
> > > A short ReadMe, to help understand the file, is at:
> > >
> > > http://zboard.wordpress.com/
> > >
> > > I can answer a few questions about the details in the file for a
> > > limited time (while my memory is fresh) .... post questions, if
> any,
> > > via comments at the Zboard.
> > >
> > >
> > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%40yahoogroups.com>,
> > > "brian_z111" <brian_z111@> wrote:
> > > >
> > > > File limits prevented me uploading the BinomialSimulation file
> (s)
> > > to
> > > > this group ... 20MB per file. I will post links to at least
one
> > > > example, at the following temporary site, sometime this week:
> > > >
> > > > http://zboard.wordpress.com/
> > > >
> > > > I will post some basic notes afterall because the task of
> following
> > > > the Excel sheets would be beyond anyone without them.
> > > >
> > > > The site might live on for a while after that.
> > > >
> > > >
> > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%
40yahoogroups.com>,
> > > "brian_z111" <brian_z111@> wrote:
> > > > >
> > > > > I decided to post the Binomial Simulation files a few days
> > > ago ...
> > > > I
> > > > > am not going to announce the upload so this post is the
> > > discussion
> > > > > link for them (one or more files will appear at some stage).
> > > > >
> > > > > FTR They do predict the eq dist quite well, for biased and
> none
> > > > > biased 'coins' but there is one thing about them that does
> > > concern
> > > > > me ... I referenced the same synthetic trade series to make
> the
> > > > > binomial distribution and to create the synthetic eq
> curves ...
> > > > that
> > > > > seems a bit incestuous in some ways.
> > > > >
> > > > > On the other hand they could be full of incorrect math
> > > assumptions
> > > > > cos I got the math off Wikipedia!
> > > > >
> > > > > Guru Brian ;-)
> > > > >
> > > > >
> > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%
> 40yahoogroups.com>,
> > > "brian_z111" <brian_z111@>
> > > wrote:
> > > > > >
> > > > > >
> > > > > > > This is a valid model as long as stationarity holds ...
I
> > > have
> > > > > > > simulated random trading 'systems' and predicted the
> outcome
> > > by
> > > > > > using
> > > > > > > binomial probability, that references a frequency
> > > distribution
> > > > of
> > > > > > the
> > > > > > > randomly generated trades, and it predicted the actual
> equity
> > > > > > > distributions extremely well (a lognormal dist appears
at
> > > very
> > > > > high
> > > > > > > N's).
> > > > > >
> > > > > >
> > > > > > More precisely, I have simulated trade series, using the
> RNG in
> > > > > > Excel, for random walks (50/50 systems) and biased
systems,
> > > with
> > > > > > normally distributed trade series (I used
> CentralLimitThereom
> > > to
> > > > > > create NormDists from the uniform output of the generator.
> > > > > >
> > > > > > I simulated equity curves, using the synthetic trades,
and
> at
> > > the
> > > > > > same time used BinomialProb to model the predicted
> distribution
> > > > of
> > > > > > the eq curves (I imagined I was tossing a coin with
variable
> > > > values
> > > > > > for heads and tails ... of course in trading we can win
> lose or
> > > > > draw
> > > > > > whereas in my model we can only win or lose).
> > > > > >
> > > > > > You might like to see the files?
> > > > > >
> > > > > > I am bored with that topic.
> > > > > >
> > > > > > I am not a mathematician ... it might be a load of old
> rubbish
> > > > for
> > > > > > all I know.
> > > > > >
> > > > > > As our discussion shows .. we can't get any statistical
> > > certainty
> > > > > > anywhere in trading ... only approximations and
> probabilties.
> > > > > >
> > > > > > It is just another approximation, like MCS and involves
> massive
> > > > > > number crunching.
> > > > > >
> > > > > > I didn't finish it because I wanted a quick and dirty
> method.
> > > > > >
> > > > > > The files are rough as old bags.
> > > > > >
> > > > > > I didn't make notes so even I have a hard time following
the
> > > > > > logic ... I had a look at them the other day I had to
start
> > > > tracing
> > > > > > the formulas in the cells to see how I had done it.
> > > > > >
> > > > > > I'll post some of them in the file section one day (Howard
> > > > collects
> > > > > > trading things).
> > > > > >
> > > > > > I won't scrub them up though ... take them or leave
them ...
> > > > sorry
> > > > > no
> > > > > > questions or explanations (anyway Howard and other maths
> people
> > > > > know
> > > > > > how to do that stuff).
> > > > > >
> > > > > >
> > > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%
> 40yahoogroups.com>,
> > > "brian_z111" <brian_z111@>
> > > > wrote:
> > > > > > >
> > > > > > > Gidday Mate,
> > > > > > >
> > > > > > > I wasn't planning on posting again today as I am going
> away
> > > for
> > > > a
> > > > > > few
> > > > > > > days ..... a good question though so I couldn't resist.
> > > > > > >
> > > > > > >
> > > > > > > I did notice Fred's comment on the priority he places on
> > > > > > sensitivity
> > > > > > > analysis.
> > > > > > >
> > > > > > > He has made the comment before and I came to that view
> > > > > > independently
> > > > > > > a way back anyway (Howard's random noise test is another
> > > > > > interesting
> > > > > > > idea for single sample analysis).
> > > > > > >
> > > > > > > I also recall that he doesn't believe scrambling the
> order of
> > > > the
> > > > > > > trades provides any meaningful feedback.
> > > > > > >
> > > > > > > That isn't a reason for me not to reach my own
> conclusions.
> > > > > > >
> > > > > > > Fred has also talked about small N retesting (walk
> forward),
> > > > and
> > > > > > > adjusting his system rules, on a short term basis, so
> while I
> > > > am
> > > > > > not
> > > > > > > keen on the idea I am keeping an open mind on the
subject.
> > > > > > >
> > > > > > >
> > > > > > >
> > > > > > > > This is the second time in the >past few
> > > > > > > > days that you seem to have equated trading/backtesting
> > > system
> > > > > > > >outcomes
> > > > > > > > to a random series of coin flip outcomes (random
binary
> > > > > > occurances).
> > > > > > > >
> > > > > > > > Serious question... what is your point? What is the
> > > > relevence
> > > > > os
> > > > > > > >the
> > > > > > > > "Coin Flip" metaphor where trading systems is
concerned?
> > > > > > >
> > > > > > > Well, developers are selling software specifically
> designed
> > > for
> > > > > > > performing MSC for trading analysis and at least one
guy
> has
> > > > > > written
> > > > > > > a book on the subject.
> > > > > > >
> > > > > > > In both software packages, that I have some familiarity
> with,
> > > > > their
> > > > > > > model assumes stationarity, and independency i.e. their
> model
> > > > > > treats
> > > > > > > the data as if it is the outcome of a coin toss with
> variable
> > > > > > values
> > > > > > > on the +- side of the coin.
> > > > > > >
> > > > > > > This is a valid model as long as stationarity holds ...
I
> > > have
> > > > > > > simulated random trading 'systems' and predicted the
> outcome
> > > by
> > > > > > using
> > > > > > > binomial probability, that references a frequency
> > > distribution
> > > > of
> > > > > > the
> > > > > > > randomly generated trades, and it predicted the actual
> equity
> > > > > > > distributions extremely well (a lognormal dist appears
at
> > > very
> > > > > high
> > > > > > > N's).
> > > > > > >
> > > > > > > The value, to me in that model, is that it is a
training
> tool
> > > > > that
> > > > > > > conditioned me to accept variance as 'normal' and if the
> > > market
> > > > > is
> > > > > > > stationary then it would have direct relevance to
> > > trading.....
> > > > > the
> > > > > > > worst case outcome would be that I could incur losses,
> with a
> > > > > > > probability as indicated by the Cumulative Distrubution
> > > > Function
> > > > > > for
> > > > > > > the possible equity outcomes (simulation is one way for
> non -
> > > > > > > mathematicians to calc this and view it in a chart).
> > > > > > >
> > > > > > >
> > > > > > > Ask yourself ....
> > > > > > >
> > > > > > > afer you have conducted a successful OOS, and collated
the
> > > > trade
> > > > > > > sample, when you start to trade it do you expect:
> > > > > > >
> > > > > > > - all trades to be the same, or similar, and occur with
> the
> > > > same
> > > > > > > frequency (TradeSim),
> > > > > > > - all trades to be the same, or similar, and have
> variations
> > > in
> > > > > the
> > > > > > > frequency (MSA),
> > > > > > > - something else?
> > > > > > >
> > > > > > > Trading, however, is not a coin toss.
> > > > > > >
> > > > > > > It is more like a sample generator that produces trades
> as a
> > > > > result
> > > > > > > of presenting dynamic data to the system (filter).
> > > > > > >
> > > > > > > To what extent could a 'real life' trading system
emulate
> a
> > > > coin
> > > > > > > toss, with variable values ... how could that come
about?
> > > > > > >
> > > > > > > (interesting that the very functional optF formula came
> about
> > > > as
> > > > > > the
> > > > > > > variable value coin toss staking formula).
> > > > > > >
> > > > > > > Is it possible or not?
> > > > > > >
> > > > > > > A lot of people seem to think it is, judging by their
> books
> > > and
> > > > > > > software.
> > > > > > >
> > > > > > > Presumably, when the underlying data changes, the sample
> > > > profile
> > > > > > > (mean, StDev etc) can change and we end up with a
better
> or
> > > > worse
> > > > > > > outcome than anticipated by the OOS.
> > > > > > >
> > > > > > > So, does the non-stationary behaviour of the markets
> > > invalidate
> > > > > the
> > > > > > > coin toss model?
> > > > > > >
> > > > > > > That is the ineresting question, and I don't know the
> answer
> > > to
> > > > > it,
> > > > > > > or even if there is a definite answer.
> > > > > > >
> > > > > > > I was hopeful that people would pick up on that key
point
> and
> > > > > shed
> > > > > > > some light on the subject.
> > > > > > >
> > > > > > > I know, from my long hours of simulating random data,
what
> > > > random
> > > > > > > behaviour looks like when I see it.
> > > > > > >
> > > > > > > Clearly the markets have a certain amount of random
> behaviour.
> > > > > > >
> > > > > > > Howard commented somewhere, or another, that there is a
> > > certain
> > > > > > > amount of randomness in the market (I can't recall the
> method
> > > > he
> > > > > > used
> > > > > > > to measure it).
> > > > > > >
> > > > > > > It is quite easy to observe if data has any random
> qualities,
> > > > > > > especially if we measure the core attributes (50/50
heads
> and
> > > > > tails
> > > > > > > and its persistence into 2,3,4 heads in a row etc).
> > > > > > >
> > > > > > > Once again I ask you to consider:
> > > > > > >
> > > > > > > if I measure the S&P500 index, on close, and it goes up
> > > approx
> > > > 50
> > > > > > and
> > > > > > > down approx 50 (+- variance that is typical of a random
> > > > binomial
> > > > > > > event) and the subsequent second head or tail follow
with
> 0.5
> > > > > prob
> > > > > > > etc I am justified in considering it top be a pseudo
> random
> > > > > > binomail
> > > > > > > event?
> > > > > > >
> > > > > > > I have done quick and dirty measurements, and accurate
> > > > > > measurements,
> > > > > > > on dependency (or on its inverse, which is
independency)
> and
> > > > find
> > > > > > > that there is a good deal of independency in the
markets
> (I
> > > > > posted
> > > > > > > some q&d code to measure that last week).
> > > > > > >
> > > > > > > I have speculated before, on the point, that the
rational
> > > > market
> > > > > is
> > > > > > > the market that follows fundamental value, which tends
to
> be
> > > >=
> > > > > the
> > > > > > > yearly (macro) timeframe, and, everything else is the
> > > > irrational
> > > > > > > market.
> > > > > > >
> > > > > > > Consider an intraday market ... what is rational about
the
> > > > price
> > > > > > > movement during any given part of the day?
> > > > > > >
> > > > > > > - Draw a trend line on the chart .. we will assume that
we
> > > know
> > > > > > what
> > > > > > > a trend is for this exercise, although that is a
debatable
> > > > point.
> > > > > > >
> > > > > > > - The trend, a straight line, is rational (it is
perfectly
> > > > > > following
> > > > > > > fundamental value).... it is 2007 and it is up ;-)
> > > > > > >
> > > > > > > - All of the ups and downs that occur around it are
> > > irrational
> > > > > > > (bucking the trend).
> > > > > > >
> > > > > > > - The trend line goes under the pivot lows.
> > > > > > >
> > > > > > > - Your system buys at the pivot lows and sells at = = 2
> StDev
> > > > > above
> > > > > > > the trend line.
> > > > > > >
> > > > > > > - Place a stop under the trend line at - 1 stDev.
> > > > > > >
> > > > > > > - Assume no commission and no slippage.
> > > > > > >
> > > > > > > - Your payoff ratio is 2/1
> > > > > > >
> > > > > > > - assume there is no variance in volatility so the PR
is a
> > > > > constant
> > > > > > > value
> > > > > > >
> > > > > > > - the win/loss ratio is determined by the random
> meandering
> > > of
> > > > > the
> > > > > > > irrational price movements up and down.
> > > > > > >
> > > > > > > Note they are irrational because people are buying and
> > > selling
> > > > at
> > > > > > the
> > > > > > > wrong time and for the wrong reasons - if they were
> rational
> > > > they
> > > > > > > would only be buying selling as fundamental values
change.
> > > > > > >
> > > > > > > - the trade series produced would look exactly that that
> > > > produced
> > > > > > by
> > > > > > > a coin tossed with +2, -1 value on it.
> > > > > > >
> > > > > > > Now, you have tested this system, OOS, and it is a
winner.
> > > > > > >
> > > > > > > What chance for stationarity when you trade live?
> > > > > > >
> > > > > > > If the trend continues there is a very good chance that
> the
> > > > > random
> > > > > > > emualator (system meeting dynamic data) will continue to
> > > > perform
> > > > > > like
> > > > > > > a biased coin +- variance i.e. the payoff ratio can't
> change
> > > > but
> > > > > > the
> > > > > > > W/L will (it always does when I toss a coin).
> > > > > > >
> > > > > > > If the trend changes your winning model will be more
> likely
> > > to
> > > > > bust.
> > > > > > >
> > > > > > > That could be the reason Fred, and others, like to
> > > continually
> > > > > > retest.
> > > > > > >
> > > > > > > I have another approach to getting around this problem
> (this
> > > is
> > > > > > > actually the real point of my posts) ...
> > > > > > >
> > > > > > > ..... to accomodate non-stationarity either adjust
> quickly OR
> > > > use
> > > > > a
> > > > > > > dimensionless model e.g. don't believe in trends and
then
> you
> > > > > can't
> > > > > > > be on the wrong side of them.
> > > > > > >
> > > > > > >
> > > > > > >
> > > > > > > However, that is only speculation.
> > > > > > >
> > > > > > > What do you think?
> > > > > > >
> > > > > > >
> > > > > > > Again ... what is the relevance of coin tosses to
trading
> IMO:
> > > > > > >
> > > > > > >
> > > > > > > - wonderful training tool
> > > > > > > - a good OOS can not predict exactly what the outcome
of
> live
> > > > > > trading
> > > > > > > will be (subject to nonstationarity) and neither can
> > > simulation
> > > > > > (coin
> > > > > > > tossing) but it gives a good approximation of the
> > > possibilities
> > > > > > (also
> > > > > > > subject to non-stationarity).
> > > > > > >
> > > > > > > As a quid pro quo .....
> > > > > > >
> > > > > > > ..... if you, or anyone else, can give me any
explanation
> > > > and/or
> > > > > > > proof that the coin toss metaphor has no relevance to
> trading
> > > I
> > > > > > would
> > > > > > > be delighted.
> > > > > > >
> > > > > > >
> > > > > > > Anyway, I think Patrick already answered the question,
or
> > > told
> > > > us
> > > > > > > where to find it.
> > > > > > >
> > > > > > > Good luck with your trading.
> > > > > > >
> > > > > > > brian_zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
> > > > > > >
> > > > > > >
> > > > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%
> 40yahoogroups.com>,
> > > "Phsst" <phsst@> wrote:
> > > > > > > >
> > > > > > > > Hello Brian,
> > > > > > > >
> > > > > > > > Thanks for the mention in your New Years post. I felt
> > > > humbled
> > > > > to
> > > > > > > be in
> > > > > > > > the same honerable mention list as Fred (He is a very
> smart
> > > > > Dude
> > > > > > (no
> > > > > > > > kidding!)) It took me a while (some years back) to
> figure
> > > out
> > > > > > what a
> > > > > > > > smart guy Fred really is. I've since learned that
when
> Fred
> > > > > > speaks,
> > > > > > > it
> > > > > > > > pays to think and be silent for a good long while
before
> > > > > drawing
> > > > > > any
> > > > > > > > conclusions.
> > > > > > > >
> > > > > > > > To your "crystal clear" point... This is the second
> time in
> > > > the
> > > > > > > past few
> > > > > > > > days that you seem to have equated trading/backtesting
> > > system
> > > > > > > outcomes
> > > > > > > > to a random series of coin flip outcomes (random
binary
> > > > > > occurances).
> > > > > > > >
> > > > > > > > Serious question... what is your point? What is the
> > > > relevence
> > > > > os
> > > > > > > the
> > > > > > > > "Coin Flip" metaphor where trading systems is
concerned?
> > > > What
> > > > > am
> > > > > > I
> > > > > > > > missing?
> > > > > > > >
> > > > > > > > Your Bud... Phsst
> > > > > > > >
> > > > > > > >
> > > > > > > >
> > > > > > > > This is the second time
> > > > > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%
> 40yahoogroups.com>,
> > > "brian_z111"
> > > <brian_z111@>
> > > > > > wrote:
> > > > > > > > >
> > > > > > > > > To be chrystal clear about my hypothesis:
> > > > > > > > >
> > > > > > > > >
> > > > > > > > > We are trying to design a system that produces the
> same
> > > set
> > > > of
> > > > > > > > > trades, in the future, as it has in the past i.e
> trades
> > > and
> > > > > not
> > > > > > > > > combinations of trades.
> > > > > > > > >
> > > > > > > > > If a solid gold coin, minted by the US treasury,
with
> a
> > > > head
> > > > > > and a
> > > > > > > > > tail clearly stamped on each side, and only two
> values +1
> > > > or -
> > > > > 1
> > > > > > > can't
> > > > > > > > > reproduce two equity curves that look the same,
after
> N
> > > > > tosses,
> > > > > > > how
> > > > > > > > > can we expect a trading system to do that when it
has
> a
> > > > range
> > > > > of
> > > > > > > > > possible values?
> > > > > > > > >
> > > > > > > > > AND it doesn't get any better as N increases.
> > > > > > > > >
> > > > > > > > > Put your time and effort into maximising the
STABILITY
> > > > > > > > > (predictability, boundness) of the trade set 'with
an
> > > edge'
> > > > > > THEN
> > > > > > > use
> > > > > > > > > MM to optimise the equity outcome the system
produces
> > > > > (optimise
> > > > > > ==
> > > > > > > > > your definition e.g. max return, min risk or
> whatever).
> > > > > > > > >
> > > > > > > > >
> > > > > > > > >
> > > > > > > > >
> > > > > > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%
> 40yahoogroups.com>,
> > > "brian_z111"
> > > brian_z111@
> > > > > > wrote:
> > > > > > > > > >
> > > > > > > > > > Howard,
> > > > > > > > > >
> > > > > > > > > > Thanks for your post.
> > > > > > > > > >
> > > > > > > > > > A very well written article.
> > > > > > > > > >
> > > > > > > > > > Some contrary comment (first referencing some of
> your
> > > > > points
> > > > > > and
> > > > > > > > > > then, later, some comments of my own):
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > > By trying many
> > > > > > > > > > > combinations of logic and parameter values, we
> will
> > > > > > eventually
> > > > > > > > > find
> > > > > > > > > > >a system that is profitable for the date range
> > > analyzed.
> > > > > > > > > >
> > > > > > > > > > You are assuming that all successful long term
> traders
> > > > > > arrived
> > > > > > > at
> > > > > > > > > > their system(s) by using this approach ... perhaps
> > > there
> > > > > are
> > > > > > > > > systems
> > > > > > > > > > out there that have no optimiseable parameters
and
> only
> > > > one
> > > > > > > > > > underlying logic.
> > > > > > > > > >
> > > > > > > > > > If so they are likely be based on primal market
> > > behaviour
> > > > > and
> > > > > > > > > > therefore persistent across markets and time i.e
> they
> > > > would
> > > > > > > have to
> > > > > > > > > > be systems based on market characteristics that
are
> > > > > relatively
> > > > > > > > > > stationary.
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > > testing the
> > > > > > > > > > > profitability of a trading system that was
> developed
> > > > > using
> > > > > > > recent
> > > > > > > > > > >data
> > > > > > > > > > > on older data is guaranteed to over-estimate the
> > > > > > > profitability of
> > > > > > > > > > the
> > > > > > > > > > > trading system.
> > > > > > > > > >
> > > > > > > > > > You know that in science (philosophy/logic) it
only
> > > takes
> > > > > one
> > > > > > > > > > refutation to dethrone the current ruling
> hypothesis ...
> > > > > > > > > >
> > > > > > > > > > if a long system, developed on the last 12 months
of
> > > data
> > > > > > (when
> > > > > > > the
> > > > > > > > > > market was experiencing a bear riot) is then
tested
> OOS
> > > > on
> > > > > the
> > > > > > > > > prior
> > > > > > > > > > years data it will outperform the in sample tests
> (OOS
> > > > > would
> > > > > > be
> > > > > > > > > > conducted on bull market data).
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > > There is very little reason to expect that
future
> > > > > behavior
> > > > > > and
> > > > > > > > > > > profitability of well known trading systems
will
> be
> > > the
> > > > > > same
> > > > > > > as
> > > > > > > > > past
> > > > > > > > > > > behavior.
> > > > > > > > > >
> > > > > > > > > > Do we have any empirical evidence of this?
> > > > > > > > > >
> > > > > > > > > > First we would have to have an agreed definition
> > > of 'well
> > > > > > > known',
> > > > > > > > > > make a list of the systems, and then perform
massive
> > > > > testing.
> > > > > > > > > >
> > > > > > > > > > To scrupulously prevent any bias creeping testing
> would
> > > > > have
> > > > > > to
> > > > > > > be
> > > > > > > > > > conducted live, and not on historical data.
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > We only know that they were successful 'in the
> past' by
> > > > IS
> > > > > > > testing,
> > > > > > > > > > or by claim.
> > > > > > > > > >
> > > > > > > > > > Do we have any, or many, certified performance
> records
> > > > > > provided
> > > > > > > by
> > > > > > > > > > traders who claim to have had success with
> those 'well
> > > > > known'
> > > > > > > > > systems.
> > > > > > > > > >
> > > > > > > > > > > Statistics gathered from in-sample results have
> > > > > > > > > > > no relationship to statistics that will be
> gathered
> > > > from
> > > > > > > trading.
> > > > > > > > > >
> > > > > > > > > > Not, so.
> > > > > > > > > >
> > > > > > > > > > They have every bearing on the stats gathered in
> > > trading
> > > > > > because
> > > > > > > > > only
> > > > > > > > > > systems with good IS performance make it to the
OS,
> or
> > > > live
> > > > > > > > > trading,
> > > > > > > > > > phase.
> > > > > > > > > >
> > > > > > > > > > OOS testing is only proceeded with because the
> analyst
> > > > has
> > > > > > every
> > > > > > > > > > expectation, or hope, that the good IS stats will
be
> > > > > > reproduced
> > > > > > > OOS.
> > > > > > > > > >
> > > > > > > > > > In fact it is the relative performance between
the
> IS
> > > and
> > > > > OOS
> > > > > > > stats
> > > > > > > > > > the encourages us to proceed or abort.
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > Re trading the edge erodes the edge:
> > > > > > > > > >
> > > > > > > > > > It is an assumption that all players are trading
> > > > > systems ...
> > > > > > > many
> > > > > > > > > are
> > > > > > > > > > not, in fact the vast majority are not.... those
who
> > > > aren't
> > > > > > > control
> > > > > > > > > > vastly greater sums of money than those who do.
> > > > > > > > > >
> > > > > > > > > > It is an assumption that all wins erode the
> system ...
> > > > they
> > > > > > > could
> > > > > > > > > be
> > > > > > > > > > just lucky wins that the trader can't exploit long
> > > term,
> > > > or
> > > > > > > > > > successful wins that the trader doesn't sustain
e.g
> > > they
> > > > > > might
> > > > > > > not
> > > > > > > > > > have the capital, use the correct staking or
> maintain
> > > > self-
> > > > > > > > > discipline
> > > > > > > > > > in the future.
> > > > > > > > > >
> > > > > > > > > > Only a very small percentage of traders are
> successful,
> > > > and
> > > > > > > hence
> > > > > > > > > > trading a successful system ... every one else
who
> is
> > > > > trading
> > > > > > is
> > > > > > > > > just
> > > > > > > > > > making noise.
> > > > > > > > > >
> > > > > > > > > > There are millions of system permutations,
> instruments,
> > > > > > markets,
> > > > > > > > > > staking systems etc ..... how many successful
> traders
> > > > would
> > > > > > it
> > > > > > > take
> > > > > > > > > > to exahaust all of the successful permutations?
> > > > > > > > > >
> > > > > > > > > > > The follow-on point, which relates to Monte
Carlo
> > > > > analysis,
> > > > > > is
> > > > > > > > > that
> > > > > > > > > > > rearranging the in-sample trades gives no
insight
> > > into
> > > > > the
> > > > > > > future
> > > > > > > > > > > characteristics of the system. Yes, you can see
> the
> > > > > effect
> > > > > > of
> > > > > > > > > taking
> > > > > > > > > > > the trades in different orders. But why bother?
> They
> > > > are
> > > > > > still
> > > > > > > > > > > in-sample results and still have no value.
> > > > > > > > > >
> > > > > > > > > > If you are engineering an F1 racing car there is
> only
> > > > track
> > > > > > > > > > testing/simulation (99.9 of the time) and racing
> > > > > performance
> > > > > > > (1% of
> > > > > > > > > > the time).
> > > > > > > > > >
> > > > > > > > > > The more information you gather off the track the
> more
> > > > > likely
> > > > > > > you
> > > > > > > > > are
> > > > > > > > > > to perform on the track OR know what to adjust
and
> when
> > > > to
> > > > > > > adjust
> > > > > > > > > it
> > > > > > > > > > if performance doesn't meet expectations.
> > > > > > > > > >
> > > > > > > > > > Do you know of any F1 teams that don't
> test/simulate?
> > > > > > > > > >
> > > > > > > > > > Do you know of any F1 teams that only
test/simulate
> > > one,
> > > > or
> > > > > > > > > limited,
> > > > > > > > > > metrics?
> > > > > > > > > >
> > > > > > > > > > What is testing if not 'massive examination of
what-
> if
> > > > > > > scenarios'?
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > Re MonteCarlo and stationarity
> > > > > > > > > >
> > > > > > > > > > I haven't studied the subject in depth.
> > > > > > > > > >
> > > > > > > > > > Mainly it is has been used outside of trading and
in
> > > > > > different
> > > > > > > ways
> > > > > > > > > > to the ways that traders use it .... possibly it
> would
> > > > be
> > > > > > best
> > > > > > > to
> > > > > > > > > > limit trading discussion to 'trading simulation'
and
> > > drop
> > > > > the
> > > > > > MC
> > > > > > > > > part
> > > > > > > > > > of the name.
> > > > > > > > > >
> > > > > > > > > > I have only found one book devoted to the subject
> and I
> > > > > regret
> > > > > > > > > buying
> > > > > > > > > > it .... 'MCS and System Trading' by Volker
Butzlaff.
> > > > > > > > > >
> > > > > > > > > > I have also test driven TradeSim and MSA.
> > > > > > > > > >
> > > > > > > > > > Referencing their trading apps.
> > > > > > > > > >
> > > > > > > > > > TS arranges the trades, as a time series, and
> randomly
> > > > > walks
> > > > > > > > > through
> > > > > > > > > > all permutations to simulate 'live trading'.....
it
> is
> > > an
> > > > > MM
> > > > > > > test,
> > > > > > > > > of
> > > > > > > > > > some kind, because equity is allocated prior to
the
> > > walk
> > > > > > > through.
> > > > > > > > > >
> > > > > > > > > > AB's backtester, in default mode, does this once.
> > > > > > > > > >
> > > > > > > > > > I assume other methods could be used ... as per my
> > > > pervious
> > > > > > XYZ
> > > > > > > > > > example:
> > > > > > > > > >
> > > > > > > > > > - abcXdefghi with simultaneous trades on day 4,
> > > > > > > > > > - we can only achieve a finite set of
permutations,
> > > > > > > > > > - the outcome of massive sampling will tend to
the
> mean
> > > +-
> > > >
> > > > > > > variance,
> > > > > > > > > > - we can simulate the eq outcomes using random
> sampling
> > > > of
> > > > > > > uniform
> > > > > > > > > > size, ave the result per random series and then
freq
> > > dist
> > > > > the
> > > > > > > means
> > > > > > > > > > (Central Limit Theoreom predicts a pseudo norm
> dist).
> > > > > > > > > > > 30 selections per series * ? series will
achieve
> an
> > > > > approx
> > > > > > of
> > > > > > > > > > possible eq outcomes (I'm not sure if
distrubtions
> obey
> > > > the
> > > > > > > laws of
> > > > > > > > > > sample error ... I don't think they do).
> > > > > > > > > >
> > > > > > > > > > TradeSims real life simulation assumes
stationarity
> > > (the
> > > > > > balls
> > > > > > > in
> > > > > > > > > the
> > > > > > > > > > bin, and their values will remain constant into
the
> > > > future).
> > > > > > > > > >
> > > > > > > > > > It also assumes that they will be selected from
the
> bin
> > > > in
> > > > > > the
> > > > > > > same
> > > > > > > > > > order, or frequency to be absolutely correct (the
> order
> > > > > > doesn't
> > > > > > > > > > change anything only the frequency).... to be
> precise
> > > > about
> > > > > > it,
> > > > > > > > > their
> > > > > > > > > > model assumes that if you have picked the worst
> > > > historical
> > > > > > loss
> > > > > > > out
> > > > > > > > > > of the bin 2/1000 trades that you will not only
> > > > experience
> > > > > > the
> > > > > > > same
> > > > > > > > > %
> > > > > > > > > > as the worst loss in the future but that it will
> also
> > > > only
> > > > > > occur
> > > > > > > > > > 2/1000 times.
> > > > > > > > > >
> > > > > > > > > > MSA puts all of the balls in the bin and selects
> them
> > > in
> > > > a
> > > > > > way
> > > > > > > that
> > > > > > > > > > allows new combinations (frequencies) until all
> possible
> > > > > > > > > frequencies
> > > > > > > > > > are exhausted i.e. they assume stationarity only
in
> > > > values
> > > > > > but
> > > > > > > not
> > > > > > > > > > frequency of dist (they assume dist is a
probability
> > > > > > statement
> > > > > > > and
> > > > > > > > > > not a constant or series of constants).... to be
> > > precise
> > > > > > about
> > > > > > > it
> > > > > > > > > > they assume that if it can happen it will.
> > > > > > > > > >
> > > > > > > > > > So, stationarity is the issue.
> > > > > > > > > >
> > > > > > > > > > So many people are confusing variance with non-
> > > > > > stationarity ....
> > > > > > > > > they
> > > > > > > > > > are being fooled by randomness e.g.
> > > > > > > > > >
> > > > > > > > > > we know that the trial records of fair coin
tosses
> are
> > > > > > > stationary
> > > > > > > > > AND
> > > > > > > > > > they have a surprising range of outcomes
> (variance) ...
> > > > > this
> > > > > > is
> > > > > > > > > very
> > > > > > > > > > easy to see if simulated and expressed as equity
> > > outcomes.
> > > > > > > > > >
> > > > > > > > > > Therefore, in trading, we can, at the least
expect a
> > > > > > tremendous
> > > > > > > > > > amount of variance ... no less than what can be
> > > expected
> > > > > from
> > > > > > a
> > > > > > > > > coin
> > > > > > > > > > toss experiment ... this variance can be estimated
> > > using
> > > > > > several
> > > > > > > > > > methods, simulation being one easy, push the
> computer
> > > > > button
> > > > > > and
> > > > > > > > > look
> > > > > > > > > > at the graph method.
> > > > > > > > > >
> > > > > > > > > > So, the value of the simulation is in training
the
> mind
> > > > to
> > > > > > > accept
> > > > > > > > > > variance and mentally prepare for the worst case
> losses.
> > > > > > > > > >
> > > > > > > > > > However, it doesn't matter how we design our
> systems we
> > > > can
> > > > > > not
> > > > > > > do
> > > > > > > > > > anything about stopping non-stationarity.
> > > > > > > > > >
> > > > > > > > > > Our system will get wiped out in OOS if it is not
> > > robust
> > > > OR
> > > > > > if
> > > > > > > the
> > > > > > > > > > market changes.
> > > > > > > > > >
> > > > > > > > > > If our system is robust it will still get wiped
out
> if
> > > > the
> > > > > > > market
> > > > > > > > > > changes.
> > > > > > > > > >
> > > > > > > > > > However, IMO, non-stationarity is not, or need
not
> be,
> > > as
> > > > > > > pervasive
> > > > > > > > > > in trading as we think.
> > > > > > > > > >
> > > > > > > > > > As I have said in the past, and already in this
> > > post ...
> > > > > many
> > > > > > > > > traders
> > > > > > > > > > are slayed by the innocuous looking Black Swan,
> because
> > > of
> > > > > > > > > ignorance
> > > > > > > > > > about its behaviours.
> > > > > > > > > >
> > > > > > > > > > Also, we are very lucky, in trading, to be able
to
> have
> > > > some
> > > > > > > > > control
> > > > > > > > > > over our dataset i.e. our sample space is bounded
by
> > > our
> > > > > > stops
> > > > > > > and
> > > > > > > > > > other inherent factors in the design.
> > > > > > > > > >
> > > > > > > > > > Example:
> > > > > > > > > >
> > > > > > > > > > If we have a stop in place then we are reasonably
> > > > unlikely
> > > > > to
> > > > > > > > > > experience losses beyond the stop + commission +
> > > > > > slippage ....
> > > > > > > when
> > > > > > > > > a
> > > > > > > > > > stop failure does occur it is very infrequent and
> not
> > > > > > > necessarily
> > > > > > > > > > career destroying.
> > > > > > > > > >
> > > > > > > > > > When we have a profit stop in place we can expect
> to at
> > > > > least
> > > > > > > get
> > > > > > > > > the
> > > > > > > > > > stop OR BETTER.
> > > > > > > > > >
> > > > > > > > > > We can also, in some circumstances, buy a
guaranteed
> > > stop
> > > > > > loss.
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > In summary:
> > > > > > > > > >
> > > > > > > > > > Because, as traders, we are statistically lucky,
we
> can
> > > > > > choose,
> > > > > > > to
> > > > > > > > > > some extent, which marbles to put in the bin.
> > > > > > > > > >
> > > > > > > > > > We can absolutely limit the worst case, ensure we
> get
> > > at
> > > > > > least
> > > > > > > the
> > > > > > > > > > best case and then take everything in between that
> > > comes
> > > > > > along.
> > > > > > > > > >
> > > > > > > > > > Since the boundaries are limited, the range of
> possible
> > > > > > values
> > > > > > > on
> > > > > > > > > the
> > > > > > > > > > balls is finite and will always be normally
> > > distributed,
> > > > > when
> > > > > > > > > > expressed as possible mean P & L (central limit
> > > > > > theoreom).....
> > > > > > > the
> > > > > > > > > > staging post on the trail towards possible equity
> > > > outcomes.
> > > > > > > > > >
> > > > > > > > > > I think under those circumstances that the balls
in
> the
> > > > > > bucket,
> > > > > > > > > > collected over a long sample, are a pretty fair
> > > > > > representation
> > > > > > > of
> > > > > > > > > > what we can expect in the future.
> > > > > > > > > >
> > > > > > > > > > If they are not then we only have ourselves to
blame
> > > for
> > > > > our
> > > > > > > poor
> > > > > > > > > > system design.
> > > > > > > > > >
> > > > > > > > > > Nothing anyone can do, can put an end to
stockmarket
> > > non-
> > > > > > > > > stationarity
> > > > > > > > > > but the challenge for the trader is to find ways
to
> > > > either
> > > > > > > absorb
> > > > > > > > > it
> > > > > > > > > > or anticipate it.
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > One important point was absent from your post.
> > > > > > > > > >
> > > > > > > > > > Kelly and Vince et al have proved conclusively
that
> > > > staking
> > > > > > > > > directly
> > > > > > > > > > and remarkably affects outcomes.
> > > > > > > > > >
> > > > > > > > > > Based on that fact I can't understand why you,
and
> many
> > > > > other
> > > > > > > > > > commentators, continue to draw inferences from
> > > backtests
> > > > > that
> > > > > > > > > include
> > > > > > > > > > a limited range of portfolio allocations ...
either
> > > don't
> > > > > > > involve
> > > > > > > > > eq
> > > > > > > > > > at all OR test across all possible eq allocations.
> > > > > > > > > >
> > > > > > > > > > (if you do opt for the latter choice wouldn't it
be
> > > > smarter
> > > > > > to
> > > > > > > do
> > > > > > > > > > that using the short mathematical solution rather
> than
> > > > the
> > > > > > long
> > > > > > > > > > massive optimisation approach?).
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > The babblers epilogue:
> > > > > > > > > >
> > > > > > > > > > I guess it is appropriate that an informal book
> should
> > > > have
> > > > > an
> > > > > > > > > > informal ending!
> > > > > > > > > >
> > > > > > > > > > "Always look on the bright side of life" ...
> > > > > > > > > >
> > > > > > > > > > ... from the life of Brian :-)
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > >
> > > > > > > > > > --- In amibroker@xxxxxxxxxxxxxxx<amibroker%
> 40yahoogroups.com>,
> > > "Howard Bandy"
> > > > > > <howardbandy@>
> > > > > > > > > > wrote:
> > > > > > > > > > >
> > > > > > > > > > > Greetings all --
> > > > > > > > > > >
> > > > > > > > > > > The posting was originally made by me to Aussie
> Stock
> > > > > > Forums
> > > > > > > on
> > > > > > > > > > > February 2, 2009. But in light of recent
> > > discussions,
> > > > > I'll
> > > > > > > cross
> > > > > > > > > > post
> > > > > > > > > > > it here.
> > > > > > > > > > >
> > > > > > > > > > > Some of my thoughts on using Monte Carlo
> techniques
> > > > with
> > > > > > > trading
> > > > > > > > > > systems.
> > > > > > > > > > >
> > > > > > > > > > > First, some background.
> > > > > > > > > > >
> > > > > > > > > > > Monte Carlo analysis is the application of
> repeated
> > > > random
> > > > > > > > > sampling
> > > > > > > > > > > done in order to learn the characteristics of
the
> > > > process
> > > > > > > being
> > > > > > > > > > studied.
> > > > > > > > > > >
> > > > > > > > > > > Monte Carlo analysis is particularly useful when
> > > closed
> > > > > form
> > > > > > > > > > solutions
> > > > > > > > > > > to the process are not available, or are too
> > > expensive
> > > > to
> > > > > > > carry
> > > > > > > > > out.
> > > > > > > > > > > Even in cases when a formula or algorithm can
> supply
> > > the
> > > > > > > > > information
> > > > > > > > > > > desired, using Monte Carlo analysis can often
be
> used.
> > > > > > > > > > >
> > > > > > > > > > > Here is an example of Monte Carlo analysis.
Assume
> > > that
> > > > a
> > > > > > > student
> > > > > > > > > is
> > > > > > > > > > > unaware of the formula that relates the area of
a
> > > > circle
> > > > > to
> > > > > > > its
> > > > > > > > > > > diameter. A Monte Carlo solution is to
> conceptually
> > > > draw
> > > > > a
> > > > > > > square
> > > > > > > > > > with
> > > > > > > > > > > sides each one unit in length on a graph, with
the
> > > > origin
> > > > > > at
> > > > > > > the
> > > > > > > > > > lower
> > > > > > > > > > > left corner. The horizontal side goes from 0.0
to
> 1.0
> > > > > along
> > > > > > > the x-
> > > > > > > > > > axis
> > > > > > > > > > > and the vertical side goes from 0.0 to 1.0
along
> the
> > > y-
> > > > > > axis.
> > > > > > > Draw
> > > > > > > > > a
> > > > > > > > > > > circle with a diameter of one unit inside the
> square.
> > > > The
> > > > > > > center
> > > > > > > > > of
> > > > > > > > > > > the circle will be at coordinates 0.5, 0.5. The
> Monte
> > > > > Carlo
> > > > > > > > > process
> > > > > > > > > > to
> > > > > > > > > > > compute the area of the circle is to generate
many
> > > > random
> > > > > > > points
> > > > > > > > > > > inside the square (each point a pair of number
> with
> > > the
> > > > > > > values of
> > > > > > > > > > the
> > > > > > > > > > > x-coordinate and y-coordinate being drawn from a
> > > uniform
> > > > > > > > > > distribution
> > > > > > > > > > > between 0.0 and 0.999999), then count the
number
> of
> > > > those
> > > > > > > points
> > > > > > > > > > that
> > > > > > > > > > > are also inside the circle. The ratio between
the
> > > > number
> > > > > of
> > > > > > > points
> > > > > > > > > > > inside the circle to the number of points drawn
> gives
> > > > an
> > > > > > > estimate
> > > > > > > > > of
> > > > > > > > > > > the constant pi. Running this experiment several
> > > times,
> > > > > > each
> > > > > > > using
> > > > > > > > > > > many random points, allows application of
> statistical
> > > > > > analysis
> > > > > > > > > > > techniques to estimate the value of pi to
within
> some
> > > > > > probable
> > > > > > > > > > > uncertainty. The process being studied in that
> > > example
> > > > is
> > > > > > > > > > stationary.
> > > > > > > > > > > The relationship between the area of the circle
> and
> > > the
> > > > > > area
> > > > > > > of
> > > > > > > > > the
> > > > > > > > > > > square is always the same.
> > > > > > > > > > >
> > > > > > > > > > > When we are developing trading systems, the
> ultimate
> > > > > > question
> > > > > > > we
> > > > > > > > > are
> > > > > > > > > > > most often asking is "What is the future
> performance
> > > of
> > > > > this
> > > > > > > > > trading
> > > > > > > > > > > system?" Recall that the measure of goodness of
a
> > > > trading
> > > > > > > system
> > > > > > > > > is
> > > > > > > > > > > your own personal (or corporate) choice. Some
> people
> > > > want
> > > > > > > highest
> > > > > > > > > > > compounded annual return with little regard for
> > > > drawdown.
> > > > > > > Others
> > > > > > > > > > value
> > > > > > > > > > > systems that have low drawdown, or infrequent
> > > trading,
> > > > or
> > > > > > > whatever
> > > > > > > > > > > else may be important. But, in all cases, the
> goal is
> > > > to
> > > > > > have
> > > > > > > the
> > > > > > > > > > > trading system be profitable. Assume that many
of
> us
> > > > are
> > > > > > > trading a
> > > > > > > > > > > single issue over a period of several years,
and
> that
> > > > the
> > > > > > > price
> > > > > > > > > per
> > > > > > > > > > > share at the end of that period is the same as
it
> was
> > > > at
> > > > > the
> > > > > > > > > > beginning
> > > > > > > > > > > of the period, with significant price
variations
> in
> > > > > > between.
> > > > > > > If we
> > > > > > > > > > > ignore frictional costs -- the bid - ask spread
of
> > > the
> > > > > > market
> > > > > > > > > maker
> > > > > > > > > > > and the commission of the broker -- we are
> playing a
> > > > zero-
> > > > > > sum
> > > > > > > > > game.
> > > > > > > > > > > Those of us who make money are taking it from
> those
> > > who
> > > > > lose
> > > > > > > > > money.
> > > > > > > > > > > If, instead of the final price being the same
as
> the
> > > > > > beginning
> > > > > > > > > > price,
> > > > > > > > > > > the final price is higher, then the price has an
> > > upward
> > > > > > bias
> > > > > > > and
> > > > > > > > > > more
> > > > > > > > > > > money is made than lost. This is when we all
get
> to
> > > > claim
> > > > > > it
> > > > > > > was
> > > > > > > > > our
> > > > > > > > > > > cleverness that made us money. If the final
price
> is
> > > > > lower,
> > > > > > > the
> > > > > > > > > > price
> > > > > > > > > > > has a downward bias and more money is lost than
> made.
> > > > > > > > > > >
> > > > > > > > > > > The price data for the period we are trading
has
> two
> > > > > > > components.
> > > > > > > > > One
> > > > > > > > > > > is the information contained in the data that
> > > > represents
> > > > > the
> > > > > > > > > reason
> > > > > > > > > > > the price changes -- the signal component. The
> other
> > > is
> > > > > > > > > everything
> > > > > > > > > > we
> > > > > > > > > > > cannot identify profitably -- the noise
component.
> > > Note
> > > > > that
> > > > > > > > > there
> > > > > > > > > > may
> > > > > > > > > > > be two (or more) signal components. Say one is
a
> long
> > > > > term
> > > > > > > trend
> > > > > > > > > in
> > > > > > > > > > > profitability of the company, and the price
> follows
> > > > > > > > > profitability.
> > > > > > > > > > Say
> > > > > > > > > > > the other is cyclic price behavior that goes
> through
> > > > two
> > > > > > > complete
> > > > > > > > > > > cycles every month for some unknown but
persistent
> > > > > reason.
> > > > > > In
> > > > > > > > > every
> > > > > > > > > > > financial price series, there is always the
random
> > > > price
> > > > > > > variation
> > > > > > > > > > > that is noise. The historical price data that
we
> see
> > > > > > > consists, in
> > > > > > > > > > this
> > > > > > > > > > > case, of trend plus cycle plus noise. Each
> component
> > > > has a
> > > > > > > > > strength
> > > > > > > > > > > that can be measured. If the signal is strong
> enough,
> > > > > > > relative to
> > > > > > > > > > the
> > > > > > > > > > > noise, our trading system can identify the
signal
> and
> > > > > issue
> > > > > > > buy
> > > > > > > > > and
> > > > > > > > > > > sell signals to us. If our trading system has
> coded
> > > > into
> > > > > it
> > > > > > > logic
> > > > > > > > > > that
> > > > > > > > > > > only recognizes changes in trend, the cycle
> component
> > > > is
> > > > > > > noise as
> > > > > > > > > > seen
> > > > > > > > > > > by that system. That is -- anything that a
trading
> > > > system
> > > > > > > does not
> > > > > > > > > > > identify itself, even though it may have strong
> signal
> > > > > > > > > > characteristics
> > > > > > > > > > > when analyzed in other ways, is noise.
> > > > > > > > > > >
> > > > > > > > > > > Over the recent decades, analysis of financial
> data
> > > has
> > > > > > > progressed
> > > > > > > > > > > from simple techniques applied by a few people
in
> a
> > > few
> > > > > > > markets
> > > > > > > > > > using
> > > > > > > > > > > proprietary tools to sophisticated techniques
> applied
> > > > by
> > > > > > many
> > > > > > > > > people
> > > > > > > > > > > in many markets using tools that are widely
> available
> > > > at
> > > > > low
> > > > > > > > > cost.
> > > > > > > > > > The
> > > > > > > > > > > techniques used successfully by Richard
Donchian
> from
> > > > the
> > > > > > > 1930s,
> > > > > > > > > and
> > > > > > > > > > > Richard Dennis and William Eckhart in the
1980s,
> were
> > > > > > simple.
> > > > > > > To
> > > > > > > > > the
> > > > > > > > > > > extent that the markets they traded did not have
> > > strong
> > > > > > > trends,
> > > > > > > > > > every
> > > > > > > > > > > profitable trade they made was at the expense of
> > > > another
> > > > > > > trader.
> > > > > > > > > > > Today, every person hoping to have a profitable
> > > career
> > > > in
> > > > > > > trading
> > > > > > > > > > > learns about techniques that did work at one
time.
> > > They
> > > > > are
> > > > > > > well
> > > > > > > > > > > documented and are often included in the trading
> > > system
> > > > > > > examples
> > > > > > > > > > when
> > > > > > > > > > > a trading system development platform is
> installed.
> > > > > > > > > > >
> > > > > > > > > > > Assume that a data series is studied over a
given
> > > date
> > > > > > range.
> > > > > > > > > Using
> > > > > > > > > > > hindsight, we can determine the beginning price
> and
> > > the
> > > > > > ending
> > > > > > > > > > price.
> > > > > > > > > > > Continuing with hindsight, we can develop a
> trading
> > > > > system
> > > > > > > that
> > > > > > > > > > > recognizes the signal component -- some
> > > characteristic
> > > > > > about
> > > > > > > the
> > > > > > > > > > data
> > > > > > > > > > > series that anticipates and signals profitable
> > > trades.
> > > > By
> > > > > > > trying
> > > > > > > > > > many
> > > > > > > > > > > combinations of logic and parameter values, we
> will
> > > > > > eventually
> > > > > > > > > find
> > > > > > > > > > a
> > > > > > > > > > > system that is profitable for the date range
> > > analyzed.
> > > > If
> > > > > > we
> > > > > > > are
> > > > > > > > > > lucky
> > > > > > > > > > > or clever, the system recognizes the signal
> portion
> > > of
> > > > > the
> > > > > > > data.
> > > > > > > > > Or,
> > > > > > > > > > > the system may have simply been fit to the
noise.
> The
> > > > > data
> > > > > > > that
> > > > > > > > > was
> > > > > > > > > > > used to develop the system is called the in-
sample
> > > > data.
> > > > > If
> > > > > > > the
> > > > > > > > > > system
> > > > > > > > > > > does recognize the signal and a few of us trade
> that
> > > > > system,
> > > > > > > > > while
> > > > > > > > > > all
> > > > > > > > > > > the rest of the traders make random trades,
those
> of
> > > us
> > > > > who
> > > > > > > trade
> > > > > > > > > > the
> > > > > > > > > > > system will make a profit. On average, the rest
> lose.
> > > > As
> > > > > > more
> > > > > > > and
> > > > > > > > > > more
> > > > > > > > > > > people join us trading the system, each of us
> earns a
> > > > > lower
> > > > > > > > > profit.
> > > > > > > > > > In
> > > > > > > > > > > order to continue trading profitably, we must be
> > > > earlier
> > > > > to
> > > > > > > > > > recognize
> > > > > > > > > > > the signal, or develop better signal recognition
> > > logic
> > > > > and
> > > > > > > trade
> > > > > > > > > > > different signals or lower strength signals. By
> the
> > > > time
> > > > > > the
> > > > > > > date
> > > > > > > > > > > range we have studied has passed, most of the
> profit
> > > > that
> > > > > > > could
> > > > > > > > > have
> > > > > > > > > > > been taken out of that price series using that
> system
> > > > has
> > > > > > been
> > > > > > > > > > taken.
> > > > > > > > > > > Perhaps the future data will continue to carry
the
> > > same
> > > > > > > signal in
> > > > > > > > > > the
> > > > > > > > > > > same strength and some traders will make
> profitable
> > > > > trades
> > > > > > > using
> > > > > > > > > > their
> > > > > > > > > > > techniques, or perhaps that signal changes, or
> > > perhaps
> > > > so
> > > > > > many
> > > > > > > > > > traders
> > > > > > > > > > > are watching that system that the per-trade
profit
> > > does
> > > > > not
> > > > > > > cover
> > > > > > > > > > > frictional costs.
> > > > > > > > > > >
> > > > > > > > > > > Data that was not used during the development
of
> the
> > > > > system
> > > > > > is
> > > > > > > > > > called
> > > > > > > > > > > out-of-sample data. But -- important point --
> testing
> > > > the
> > > > > > > > > > > profitability of a trading system that was
> developed
> > > > > using
> > > > > > > recent
> > > > > > > > > > data
> > > > > > > > > > > on older data is guaranteed to over-estimate the
> > > > > > > profitability of
> > > > > > > > > > the
> > > > > > > > > > > trading system.
> > > > > > > > > > >
> > > > > > > > > > > Financial data is not only time-series data,
but
> it
> > > is
> > > > > also
> > > > > > > > > > > non-stationary. There are many reasons related
to
> > > > > > > profitability of
> > > > > > > > > > > companies and cyclic behavior of economies to
> explain
> > > > why
> > > > > > the
> > > > > > > > > data
> > > > > > > > > > is
> > > > > > > > > > > non-stationary. But -- another important point -
-
> > > every
> > > > > > > profitable
> > > > > > > > > > > trade made increases the degree to which the
data
> is
> > > > non-
> > > > > > > > > stationary.
> > > > > > > > > > > There is very little reason to expect that
future
> > > > > behavior
> > > > > > and
> > > > > > > > > > > profitability of well known trading systems
will
> be
> > > the
> > > > > > same
> > > > > > > as
> > > > > > > > > past
> > > > > > > > > > > behavior.
> > > > > > > > > > >
> > > > > > > > > > > Which brings me to several key points in trading
> > > systems
> > > > > > > > > > development.
> > > > > > > > > > >
> > > > > > > > > > > 1. Use whatever data you want to to develop your
> > > > systems.
> > > > > > All
> > > > > > > of
> > > > > > > > > the
> > > > > > > > > > > data that is used to make decisions about the
> logic
> > > and
> > > > > > > operation
> > > > > > > > > of
> > > > > > > > > > > the system is in-sample data. When the system
> > > > developer --
> > > > >
> > > > > > > that
> > > > > > > > > is
> > > > > > > > > > you
> > > > > > > > > > > and me -- is satisfied that the system might be
> > > > > profitable,
> > > > > > > that
> > > > > > > > > > > conclusion was reached after thorough and
> extensive
> > > > > > > manipulation
> > > > > > > > > of
> > > > > > > > > > > the trading logic until it fits the data. The
in-
> > > sample
> > > > > > > results
> > > > > > > > > are
> > > > > > > > > > > good -- they are Always good -- we do not stop
> > > fooling
> > > > > with
> > > > > > > the
> > > > > > > > > > system
> > > > > > > > > > > until they are good. In-sample results have no
> value
> > > in
> > > > > > > > > predicting
> > > > > > > > > > the
> > > > > > > > > > > future performance of a trading system. None!
It
> does
> > > > not
> > > > > > > matter
> > > > > > > > > > > whether the in-sample run results in three
> trades, or
> > > > 30,
> > > > > or
> > > > > > > > > 30,000.
> > > > > > > > > > > In-sample results have no value in predicting
the
> > > future
> > > > > > > > > performance
> > > > > > > > > > > of a trading system. Statistics gathered from
in-
> > > sample
> > > > > > > results
> > > > > > > > > have
> > > > > > > > > > > no relationship to statistics that will be
> gathered
> > > > from
> > > > > > > trading.
> > > > > > > > > > None!
> > > > > > > > > > >
> > > > > > > > > > > The follow-on point, which relates to Monte
Carlo
> > > > > analysis,
> > > > > > is
> > > > > > > > > that
> > > > > > > > > > > rearranging the in-sample trades gives no
insight
> > > into
> > > > > the
> > > > > > > future
> > > > > > > > > > > characteristics of the system. Yes, you can see
> the
> > > > > effect
> > > > > > of
> > > > > > > > > taking
> > > > > > > > > > > the trades in different orders. But why bother?
> They
> > > > are
> > > > > > still
> > > > > > > > > > > in-sample results and still have no value.
> > > > > > > > > > >
> > > > > > > > > > > The Only way to determine the future
performance
> of a
> > > > > > trading
> > > > > > > > > system
> > > > > > > > > > > is to use it on data that it has never seen
> before.
> > > > Data
> > > > > > that
> > > > > > > has
> > > > > > > > > > not
> > > > > > > > > > > been used to develop the system is out-of-
sample
> data.
> > > > > > > > > > >
> > > > > > > > > > > 2. As a corollary to my comments above, that
out-
> of-
> > > > > sample
> > > > > > > data
> > > > > > > > > Must
> > > > > > > > > > > be more recent that the in-sample data. The
> results
> > > of
> > > > > using
> > > > > > > > > earlier
> > > > > > > > > > > out-of-sample data are almost guaranteed to be
> better
> > > > > than
> > > > > > the
> > > > > > > > > > results
> > > > > > > > > > > of using more recent out-of-sample data.
> > > Consequently,
> > > > > > > techniques
> > > > > > > > > > > known as boot-strap or jack-knife out-of-sample
> > > testing
> > > > > are
> > > > > > > > > > > inappropriate for testing financial trading
> systems.
> > > > > > > > > > >
> > > > > > > > > > > So, when is Monte Carlo analysis useful in
trading
> > > > system
> > > > > > > > > > development?
> > > > > > > > > > >
> > > > > > > > > > > 1. During trading system development. It may be
> > > > possible
> > > > > to
> > > > > > > test
> > > > > > > > > the
> > > > > > > > > > > robustness of the system by making small
changes
> in
> > > the
> > > > > > > values of
> > > > > > > > > > > parameters. This can be done by making a series
> of in-
> > > > > > sample
> > > > > > > test
> > > > > > > > > > > runs, each run using the central value of the
> > > parameter
> > > > > > (such
> > > > > > > as
> > > > > > > > > the
> > > > > > > > > > > length of a moving average) adjusted by a random
> > > > amount.
> > > > > The
> > > > > > > > > values
> > > > > > > > > > of
> > > > > > > > > > > the parameters can be chosen using Monte Carlo
> > > methods.
> > > > > > Note
> > > > > > > that
> > > > > > > > > > this
> > > > > > > > > > > does not guarantee that the system that works
> with a
> > > > wide
> > > > > > > range of
> > > > > > > > > > > values over the in-sample period will be
> profitable
> > > out-
> > > > > of-
> > > > > > > > > sample,
> > > > > > > > > > but
> > > > > > > > > > > it does help discard candidate systems that are
> > > > unstable
> > > > > > due
> > > > > > > to
> > > > > > > > > > > selection of specific parameter values.
> > > > > > > > > > >
> > > > > > > > > > > Note that this technique is not appropriate for
> all
> > > > > > > parameters.
> > > > > > > > > For
> > > > > > > > > > > example, a parameter may take on a limited set
of
> > > > values,
> > > > > > > each of
> > > > > > > > > > > which selects a specific logic. Such parameters,
> > > > > associated
> > > > > > > with
> > > > > > > > > > what
> > > > > > > > > > > are sometimes called state variables, are only
> > > > meaningful
> > > > > > for
> > > > > > > a
> > > > > > > > > > > limited set of values.
> > > > > > > > > > >
> > > > > > > > > > > 2. During trading system development. It may be
> > > > possible
> > > > > to
> > > > > > > test
> > > > > > > > > the
> > > > > > > > > > > robustness of the system by making small
changes
> in
> > > the
> > > > > > data.
> > > > > > > > > > Adding a
> > > > > > > > > > > known amount of noise may help quantify the
> signal to
> > > > > noise
> > > > > > > ratio.
> > > > > > > > > > > When done over many runs, it may reduce (smooth
> out)
> > > the
> > > > > > > > > individual
> > > > > > > > > > > noise components and help isolate the signal
> > > components.
> > > > > > > > > > >
> > > > > > > > > > > 3. During trading system development. It may be
> > > > possible
> > > > > to
> > > > > > > > > > > investigate the effect of having more
> opportunities
> > > to
> > > > > > trade
> > > > > > > than
> > > > > > > > > > > resources to trade. If the trading system has
all
> of
> > > > the
> > > > > > > following
> > > > > > > > > > > conditions:
> > > > > > > > > > > A. A large number of signals are generated at
> exactly
> > > > the
> > > > > > same
> > > > > > > > > time.
> > > > > > > > > > > For example, using end-of-day data, 15 issues
> appear
> > > on
> > > > > the
> > > > > > > Buy
> > > > > > > > > > list.
> > > > > > > > > > > B. The entry conditions are identical. For
> example,
> > > all
> > > > > the
> > > > > > > > > issues
> > > > > > > > > > are
> > > > > > > > > > > to be purchased at the market on the open. If,
> > > instead,
> > > > > the
> > > > > > > > > entries
> > > > > > > > > > > are made off limit or stop orders, these can and
> > > should
> > > > be
> > > > > > > > > resolved
> > > > > > > > > > > using intra-day data -- as they would be in
real
> time
> > > > > > trading.
> > > > > > > > > > > C. The number of Buys is greater than can be
taken
> > > with
> > > > > the
> > > > > > > > > > available
> > > > > > > > > > > funds. For example, you only have enough money
to
> buy
> > > 5
> > > > > of
> > > > > > > the 15.
> > > > > > > > > > >
> > > > > > > > > > > If your trading system development platform
> provides
> > > a
> > > > > > method
> > > > > > > for
> > > > > > > > > > > breaking ties, use it. For example, you may be
> able
> > > to
> > > > > > > calculate a
> > > > > > > > > > > reward-to-risk value for each of the potential
> > > trades.
> > > > > Take
> > > > > > > those
> > > > > > > > > > > trades that offer the best ratio. AmiBroker, for
> > > > example,
> > > > > > > allows
> > > > > > > > > the
> > > > > > > > > > > developer to include logic to compute what is
> known as
> > > > > > > > > > PositionScore.
> > > > > > > > > > > Trades that are otherwise tied will be taken in
> order
> > > of
> > > > > > > > > > PositionScore
> > > > > > > > > > > for as long as there are sufficient funds.
> > > > > > > > > > >
> > > > > > > > > > > Alternatively, Monte Carlo methods allow you to
> test
> > > > > random
> > > > > > > > > > selection
> > > > > > > > > > > of issues to trade. My feeling is that very few
> > > traders
> > > > > > will
> > > > > > > make
> > > > > > > > > a
> > > > > > > > > > > truly random selection of which issue to buy
from
> the
> > > > > long
> > > > > > > list. I
> > > > > > > > > > > recommend quantifying the selection process and
> > > > > > incorporating
> > > > > > > it
> > > > > > > > > > into
> > > > > > > > > > > the trading system logic.
> > > > > > > > > > >
> > > > > > > > > > > 4. During trading system validation. After the
> > > trading
> > > > > > system
> > > > > > > has
> > > > > > > > > > been
> > > > > > > > > > > developed using the in-sample data, it is
tested
> on
> > > out-
> > > > > of-
> > > > > > > sample
> > > > > > > > > > > data. Preferably there is exactly one test,
> followed
> > > by
> > > > a
> > > > > > > > > decision
> > > > > > > > > > to
> > > > > > > > > > > either trade the system or start over. Every
time
> the
> > > > out-
> > > > > > of-
> > > > > > > > > sample
> > > > > > > > > > > results are examined and any modification is
made
> to
> > > > the
> > > > > > > trading
> > > > > > > > > > > system based on those results, that previously
> out-of-
> > > > > > sample
> > > > > > > data
> > > > > > > > > > has
> > > > > > > > > > > become in-sample data. It takes very few (often
> just
> > > > one
> > > > > > will
> > > > > > > do
> > > > > > > > > it)
> > > > > > > > > > > peeks at the out-of-sample results followed by
> > > trading
> > > > > > system
> > > > > > > > > > > modification to contaminate the out-of-
sampleness
> and
> > > > > > destroy
> > > > > > > the
> > > > > > > > > > > predictive value of the out-of-sample analysis.
> > > > > > > > > > >
> > > > > > > > > > > One possibly valuable technique that will help
you
> > > > decide
> > > > > > > whether
> > > > > > > > > to
> > > > > > > > > > > trade a system or start over is a Monte Carlo
> > > analysis
> > > > of
> > > > > > the
> > > > > > > > > > > Out-of-sample results. The technique is a
> reordering
> > > of
> > > > > > > trades,
> > > > > > > > > > > followed by generation of trade statistics and
> equity
> > > > > > curves
> > > > > > > that
> > > > > > > > > > > would have resulted from each trade sequence.
What
> > > this
> > > > > > > provides
> > > > > > > > > is
> > > > > > > > > > a
> > > > > > > > > > > range of results that might have been achieved.
> Note
> > > > that
> > > > > > this
> > > > > > > > > > > technique cannot be applied to all trading
systems
> > > > without
> > > > > > > > > knowledge
> > > > > > > > > > > of how the system works. If the logic of the
> system
> > > > makes
> > > > > > use
> > > > > > > of
> > > > > > > > > > > earlier results, such as equity curve analysis
or
> > > > > sequence
> > > > > > of
> > > > > > > > > > winning
> > > > > > > > > > > or losing trades, then rearranging the trades
will
> > > > result
> > > > > > in
> > > > > > > trade
> > > > > > > > > > > sequences that could never have happened and the
> > > > analysis
> > > > > is
> > > > > > > > > > > misleading and not useful. Also note that most
of
> the
> > > > > > results
> > > > > > > > > > produced
> > > > > > > > > > > by the Monte Carol analysis could also be
> developed
> > > from
> > > > > > > > > techniques
> > > > > > > > > > of
> > > > > > > > > > > probability and statistics without using Monte
> Carlo
> > > > > > > techniques --
> > > > > > > > > > > runs of wins and losses, distribution of
drawdown,
> > > and
> > > > so
> > > > > > > forth.
> > > > > > > > > > >
> > > > > > > > > > > In summary --
> > > > > > > > > > >
> > > > > > > > > > > Monte Carlo analysis can be useful in trading
> system
> > > > > > > development.
> > > > > > > > > > But
> > > > > > > > > > > only in those cases described in items 1, 2, 3,
> and 4
> > > > > above.
> > > > > > > > > > >
> > > > > > > > > > > Rearranging in-sample trades has no value.
> > > > > > > > > > >
> > > > > > > > > > > Obtaining meaningful results from Monte Carlo
> > > > techniques
> > > > > > > requires
> > > > > > > > > > > large numbers -- thousands -- of additional
test
> runs.
> > > > > > > > > > >
> > > > > > > > > > > If you decide to apply Monte Carlo techniques, I
> > > > > recommend
> > > > > > > that
> > > > > > > > > they
> > > > > > > > > > > be applied sparingly, primarily to test
> robustness of
> > > a
> > > > > > likely
> > > > > > > > > > trading
> > > > > > > > > > > system as in numbers 1 and 2 above, not in the
> early
> > > > > > > development
> > > > > > > > > > stages.
> > > > > > > > > > >
> > > > > > > > > > > On the other hand -----
> > > > > > > > > > >
> > > > > > > > > > > What is tremendously useful in trading system
> > > > development
> > > > > is
> > > > > > > > > > automated
> > > > > > > > > > > walk-forward testing. I believe that is the
Only
> way
> > > to
> > > > > > > answer the
> > > > > > > > > > > question "How can I gain confidence that my
> trading
> > > > > system
> > > > > > > will be
> > > > > > > > > > > profitable when traded?" But that is the
subject
> of
> > > > > another
> > > > > > > > > posting.
> > > > > > > > > > >
> > > > > > > > > > > Thanks for listening,
> > > > > > > > > > > Howard
> > > > > > > > > > >
> > > > > > > > > >
> > > > > > > > >
> > > > > > > >
> > > > > > >
> > > > > >
> > > > >
> > > >
> > >
> > >
> > >
> >
>
------------------------------------
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