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Apologies to the group for spam.
My brian_z mailbox got spammed by Rapidshare and I didn't give them
that address.
They must have picked up on the group address when I posted a link
here.
I assume you all must have got spammed as well.
Very sorry.
I didn't send any emails out.
In future I will only put the links on my website and refer people to
the webpage.
--- In amibroker@xxxxxxxxxxxxxxx, "brian_z111" <brian_z111@xxx> wrote:
>
> 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@> 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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