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<snip> I am one of those people who believe that choosing the objective function is
extremely important and should be done before serious system development.<snip>
There is a university course right there, all by itself!
--- In amibroker@xxxxxxxxxxxxxxx, Howard B <howardbandy@xxx> wrote:
>
> Greetings all --
>
> I am one of those people who believe that choosing the objective function is
> extremely important and should be done before serious system development.
>
> A properly defined objective function will incorporate those characteristics
> of the trading system that fit your personality and trading requirements
> into your trading systems. When you have designed, tested, and validated a
> trading system using your objective function, you will be comfortable with
> the trades it makes -- that is guaranteed by having chosen the objective
> function in advance.
>
> It is also interesting to note that some objective functions tend to reward
> / select values for the logic and parameters that result in trading systems
> that do not trade well out-of-sample. In particular, be careful using net
> profit, sharpe ratio, and so forth. By all means, define your own custom
> objective function metric, program it, and tell AmiBroker to use it.
>
> Thanks for listening,
> Howard
>
>
> On Fri, May 8, 2009 at 3:52 AM, brian_z111 <brian_z111@xxx> wrote:
>
> >
> >
> > Paolo,
> >
> > Thankyou very much for the compliments and the feedback.
> >
> > I agree with your points.
> >
> > My posts are like a cartoon strip - I draw a picture and characterise and
> > exaggerate the prominent features then colour it in with bold colours ... I
> > want to provoke people to think about it.
> >
> > Thinking about it critically is more important than agreeing.
> >
> > brian_"the asymptotes are my friends"_z111
> >
> >
> > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%40yahoogroups.com>, "Paolo
> > Cavatore" <pcavatore@> wrote:
> > >
> > > Hi Brian,
> > >
> > > thanks for the link...I fully agree that too much weight is given to the
> > variance of the equity curve but that's how the t-test (aka K-ratio) works.
> > >
> > > Furthermore as for all the objective functions there is often a trade-off
> > and at the end of the day it's a personal choice to pick up the best one
> > (I've also heard people saying that choosing the right objective funtion to
> > be maximised is the real holy grail in trading). There may be people that
> > put a high weight on deviation of the equity line so they still can benefit
> > from K-ratio. Personally I would prefer to minimise negative daily returns
> > but that's a personal choice again.
> > >
> > > Anyway now I'm more confident with K-ratio's drawbacks. Thanks for the
> > file. Very useful.
> > >
> > > Brian, let me also say that's also a great website. It's worth to have a
> > look for other AB quant people and Vince's fan (I hope to be there soon :-)
> > >
> > > paolo
> > >
> > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%40yahoogroups.com>,
> > "brian_z111" <brian_z111@> wrote:
> > > >
> > > > Hi Paolo,
> > > >
> > > > Housekeeping ... best ask my wife about my performance record :-)
> > > >
> > > > http://zboard.wordpress.com/downloads/
> > > >
> > > > Scroll down to Miscellaneous Files 2.3 >> K-ratio.xls
> > > >
> > > >
> > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%40yahoogroups.com>, "Paolo
> > Cavatore" <pcavatore@> wrote:
> > > > >
> > > > > Hi Brian,
> > > > >
> > > > > I cannot find your K-ratio file anymore...have you removed it?
> > > > >
> > > > > paolo
> > > > >
> > > > >
> > > > >
> > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%40yahoogroups.com>,
> > "brian_z111" <brian_z111@> wrote:
> > > > > >
> > > > > > Gerry,
> > > > > >
> > > > > > > Is it possible that there was a typo in the K-ratio correction?
> > > > > > > Perhaps Mr Kestner has made another change?
> > > > > > > I don't have his books or articles, i just gave up on the k-ratio
> > > > > > > because i didn't think it was telling me anything useful.
> > > > > > >
> > > > > > > I would be interested if you or anyone else have run some
> > examples
> > > > > > > where K-ratio is high and exposure is high, and what are the
> > other
> > > > > > > backtest numbers.
> > > > > >
> > > > > > I have the latest version of his book and what you have posted is
> > > > > > correct.
> > > > > >
> > > > > > I have uploaded a k-ratio.xls spreadsheet to the file section of
> > this
> > > > > > forum (there is an old version there under my old name - brian.z123
> > -
> > > > > > not that one - the new one by brian_z111
> > > > > >
> > > > > > It is a dymamic file with a 20 datapoint example.
> > > > > >
> > > > > > Instructions are included but it is self-explanatory anyway.
> > > > > >
> > > > > > It should help sort it out a bit.
> > > > > >
> > > > > > brian_z
> > > > > >
> > > > > >
> > > > > > --- In amibroker@xxxxxxxxxxxxxxx <amibroker%40yahoogroups.com>,
> > "gerryjoz" <geraldj@> wrote:
> > > > > > >
> > > > > > > Grant,
> > > > > > > in your post you asked me to elaborate on why i thought the
> > K-ratio
> > > > > > > was a waste of space and RRR was simpler/better. What i have
> > found
> > > > > > is
> > > > > > > that k-ratio is generally lower the higher the exposure for the
> > same
> > > > > > > or similar trading systems in back test. If you want a high
> > k-ratio,
> > > > > > > according to the AB calc, don't buy or sell!
> > > > > > > Here is a contrived (curve-fit) example (run on real data) over a
> >
> > > > > > few
> > > > > > > years
> > > > > > > CAR 33%
> > > > > > > Profit factor 7
> > > > > > > CAR/MDD 2.8
> > > > > > > Max Sys DD % 11.5%
> > > > > > > RRR 2.15
> > > > > > > K-ratio .096
> > > > > > > exposure 49%
> > > > > > > #trades 170
> > > > > > >
> > > > > > > the K-ratio definitio in AB help is
> > > > > > > "
> > > > > > > K-Ratio - Detects inconsistency in returns. Should be 1.0 or
> > more.
> > > > > > The
> > > > > > > higher K ratio is the more consistent return you may expect from
> > > > > > the
> > > > > > > system. Linear regression slope of equity line multiplied by
> > square
> > > > > > > root of sum of squared deviations of bar number divided by
> > standard
> > > > > > > error of equity line multiplied by square root of number of bars.
> >
> > > > > > More
> > > > > > > information: Stocks & Commodities V14:3 (115-118): Measuring
> > System
> > > > > > > Performance by Lars N. Kestner
> > > > > > > "
> > > > > > > personally i prefer measures which are more easily comprehended.
> > > > > > This
> > > > > > > one isn't, even tho 40 years ago i did do maths & stats at uni.
> > > > > > > In any case, back in May 2004 Tomasz changed the calc...
> > > > > > > ======>
> > > > > > >
> > > > > > > K-ratio calculation changed. following the change made by its
> > > > > > creator,
> > > > > > > Mr. Lars Kestner.
> > > > > > >
> > > > > > > Quoting from the book "Quantitative Trading Strategies" from 2003
> > by
> > > > > > > Lars Kestner:
> > > > > > >
> > > > > > > [ - - - ]
> > > > > > > " The K-ratio is a unitless measure of performance that can be
> > > > > > > compared across markets and time periods. [ - - - ] Traders
> > should
> > > > > > > search for strategies yielding K-ratios greater than +0.50.
> > > > > > Together,
> > > > > > > the Sharpe ratio and K-ratio are the most important
> > > > > > > measures when evaluating trading strategy performance. Note: When
> > I
> > > > > > > created the K-ratio in 1996, I thought I had created a
> > > > > > > robust measure to evaluate performance. In mid-2000, trader Bob
> > > > > > Fuchs
> > > > > > > brought a small error to my attention regarding the
> > > > > > > scaling of the K-ratio. He was correct in his critique and I have
> > > > > > > corrected the error in this text. Publications prior to 2002 will
> > > > > > > show a different formula for the K-ratio. The updated formula in
> > > > > > this
> > > > > > > book is correct."
> > > > > > >
> > > > > > > Mr Lars Kestner has corrected his formula based on this critique:
> > > > > > > K-ratio = slope / ( sterr * per )
> > > > > > >
> > > > > > > slope: Linear regression slope of equity line
> > > > > > > sterr: Standard error of slope
> > > > > > > per: Number of periods in the performance test
> > > > > > >
> > > > > > > Special thanks to Jeremy Berkovits who brought that to my
> > attention.
> > > > > > >
> > > > > > > <======
> > > > > > > There was quite a bit of discussion at the time.
> > > > > > > I understand RRR intuitively, and when i look at the other ratios
> > i
> > > > > > > can see why one is higher or lower (with a bit of checking).
> > > > > > >
> > > > > > > Is it possible that there was a typo in the K-ratio correction?
> > > > > > > Perhaps Mr Kestner has made another change?
> > > > > > > I don't have his books or articles, i just gave up on the k-ratio
> > > > > > > because i didn't think it was telling me anything useful.
> > > > > > >
> > > > > > > I would be interested if you or anyone else have run some
> > examples
> > > > > > > where K-ratio is high and exposure is high, and what are the
> > other
> > > > > > > backtest numbers.
> > > > > > >
> > > > > > > regards
> > > > > > > Gerry
> > > > > > >
> > > > > >
> > > > >
> > > >
> > >
> >
> >
> >
>
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