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Hi Markus --
I also own Tharp's books. He does use a proprietary package called "Know Your System" for his analysis.
There are many ways to use Monte Carlo techniques. The different algorithms are more about generating random numbers and defining the distributions from which the random values are drawn and the way they are used.
Tomasz has implemented the Mersenne Twister algorithm in AmiBroker. Mersenne twister is much better (higher in metrics that describe randomness, such as having a long period and not having patterns within the series) than the random number generators that come with C++, Excel, etc. If you use Excel for Monte Carlo analysis, be sure to get a Mersenne Twister Excel addin before you start. Here is one source: http://www.financial-risk-manager.com/risks/analytics/random/rand.html#mt19937. There are others.
The distributions can be very problem specific, but all start out using "uniform" distributions and build from there to "normal", and so forth.
Back to Tharp. I have some criticisms of Tharp's "Definitive Guide to Position Sizing". There are two in particular.
1. He arbitrarily and inappropriately sets an upper limit on the number of data points to be used in calculating his System Quality Number. (His SQN is essentially a t statistic, which he acknowledges in one sentence early in the book, but ignores from then on.)
2. He is completely unrealistic about what level of SQN trading system developers should be able to achieve. As a quick and dirty measure, a t statistic of about 2.0 suggests significance at about the 0.05 level for N of about 20 data points. A trading system that uses expectancy as its metric, computes the t statistic on actual trades or truly out-of-sample results (in-sample results have no value as estimators of future profitability), and has a t statistic of 2.5 to 3.0 will result in extraordinary profitability. Tharp talks about achieving scores of 6 or 7. Give any one of us a system that has a score of 6 and we can buy Manhattan in about a year starting from $10,000.
So, read Tharp. His books do have value. But be aware that there are many aspects of trading system development, testing, and validation that he simply does not understand -- and some of his writing are seriously misleading. I have made many posts on Aussie Stock Forums (http://www.aussiestockforums.com/) on this topic, and also on trading system development. Search using my name.
I have corresponded with Van Tharp about some of these issues and he acknowledges my points. He even gives me credit in DGPS. One of the attendees of my workshops in Australia a few months ago is a personal friend of Vans and agrees with my assessment.
Thanks,
Howard
On Sun, Jan 24, 2010 at 10:42 AM, Markus Witzler <funnybiz@xxxxxx> wrote:
Hello Howard,
just stepping in here since MC analysis may be an
issue keeping me busy in near future (though I haven´t yet developed much
expertise in it).
Are there different algorithms of MC simulators?
I wonder what to look for when considerung a
product, since different "qualities" in algorithms may turn out different levels
of "quality" (i.e. what scenarios to expect in the future).
Van Tharp for instance claimes to have Chris
Anderson developed a software package called "Know your system" with an MC
simulator in it - he uses it for studies for his book on money mangement which I
own.
I´m looking forward to buying your book since MC is
covered there to as you said below...
Thanks
Markus
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