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No rush.... I have been sitting on it for at least 2 years now.
The full BinomialSimulation story won't be finished for months... I
will only post about once a month.
First I am going to track back to the beginning, for the benefit of
non-mathematicians.
Also, I will upload some stress test files, OR post images of the key
graphs from those files, so interested parties don't need to repeat
the massive simulations, for samples with bias and/or higher
dispersion, that I have already done.
(Given your experience you would probably be best to sit back and
wait until I post the BS maths expression ... it will be very easy
for you to test and critique my theory at that stage ... you can
leave the hack work to me).
Note that it is a work in progress i.e. I am working 'live', warts
and all, and I might not finish it, or leave it on the net, (I like
the Buddhist idea of 'pointing to the way' and demonstrating
impermanence).
I probably won't 'advertise' here, in this forum, but BS posts will
go onto the Zboard blog page so they can get picked up by RSS.
The other pages at the site, which are mainly just resources etc,
won't be disseminated via RSS.
FYI I think BS is a significant method compared to bootstrapping and
MonteCarlo (considering their pros and cons) e.g. I disagree with
some of the assumptions of Timothy Masters, in his 2006 MCS article
at Aronsons 'EvidenceBasedTechnicalAnalysisSite' site... I also found
TM indecisive at some key points along the way.
However, I am not going to follow the academic method of citing
others and criticising their work.
I am very pleased you are looking at it.
It has to stand up to the critique of informed mathematicians, like
yourself (more so than other new ideas because I am a naive
mathematician and an intuitive rather than a trained
objectivist/academic).
Around 20 people downloaded the file .... some of them would be just
curious, or 'getting an education' (which are good things in
themselves) .... so at best there are only a few hard core analysts
considering my 'thesis'.
Pity QT isn't still around ... he was a very nice guy and very good
on this stuff ;-)
The Zboard site does allow for collaboration.
If one or two self-managing people came along who wanted to add
something I could give them access ..... in that case the site would
stay online for the benefit of future googling traders who are in
search of trading truths.
Cheers and thanks for your interest ... it's a compliment.
brian.
--- In amibroker@xxxxxxxxxxxxxxx, Howard B <howardbandy@xxx> wrote:
>
> Hi Brian --
>
> The zboard file worked fine.
>
> I have been snowed under with maintenance jobs the past week, so
it'll take
> me a couple of days to look at it.
>
> Thanks,
> Howard
>
> On Tue, Feb 10, 2009 at 1:06 AM, 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 <amibroker%40yahoogroups.com>,
> > "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 <amibroker%40yahoogroups.com>,
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><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><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><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><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><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><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><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>
> > <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
> > > >
> > ...
> >
> > [Message clipped]
>
------------------------------------
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