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RE: Significance of Statistics in System Testing



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Rudolf

I hope you don't mind, but I've added a few comments to your post.  Again,
these are just my opinions.

Regards,

Guy
Fax (630) 604-1589

-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of rudolf stricker
Sent: Monday, April 17, 2000 8:42 AM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Significance of Statistics in System Testing

On Mon, 17 Apr 2000 07:26:45 +0530, you wrote:

>In a system testing it is said that more the events (statistics)
> the better would be the result.

This may not be correct, because market characteristics can definitely
change over time. If so, it does not make much sense to fit the system
to "old behavior". Moreover, it might make sense to emphasize the most
recent market behavior, e.g. by weighting over time.

Very astute!  I'm impressed.  This is something my dad has said for years
and something most traders don't agree with.  It's not what worked well 5
years ago, but what's working in the last six months.  It has taken me a
long time to accept this premise, as I want everything to work the same way,
forever.  Unfortunately, the market is dynamic, not static.  Emotion,
weather, famine, war, euphoria and the gamut of human psychology all impact
the markets at any given time.  I'll save more on this for your last
remarks.

>This also tells that a system
>having lesser number of events is doubtful?

This in general seems to be true, because more events lead to more
(statistically) reliable test samples.

>If you have data
>of a longer period than getting a large number of statistics is
> not a problem but if you have a data of lesser number of
>periods than what to do? Does it mean, that one cannot apply
>the system to a stock which has a less trading history
> (say 2-4 years).But a question arises how many events a system
> should produce to draw a reasonable conclusion?

You may test this e.g. by constructing (probability) distributions of
price changes for different time periods. If the distributions do not
change "too much" e.g. in terms of tail-iness, you may use the shorter
time period.

>If a system looks into one single pattern it may produce lesser
>events. So can we say that the pattern is doubtful because of
>lesser statistics? What is the solution?

Imo, in most situations it does not make much sense to use only one
single system, because in general any system works like a filter,
which is looking only for (a) special pattern(s). This way, all other
trading strategies (or profitable patterns) are not considered by this
system.

A solution might be to use _a bunch of systems_ directed to different
profitable patterns. This kind of compound system may smoothly
maintained and optimized by a genetic algorithm, which can handle
"generations" of systems.

Again I'm impressed.  This is exactly what we have done, and why it has been
so hard for me to put it into words.  We have a bunch of unique systems that
we have developed, that all work fairly well by themselves.  By combining
these various systems (I call them indicators, but reflecting on your words,
systems would be a better choice) with weighting factors, we are able to
'statistically' recognize different markets.  If we have discovered nothing
over the last 50 years, it's that we're attempting to develop methodologies
to 'forecast' a constantly changing environment.  Since we started building
these systems before there were hand calculators, computers, etc., we were
forced to develop a certain 'feel' for numbers and the marketplace.  This
'feel' is something that only comes from experience.  There is absolutely no
way that we would be able to develop our existing system and techniques
using the tools available today.  I'm not saying that's good or bad, just
that what we do could never be developed using Metastock, for example.
Still we use Metastock to test new ideas and techniques, but I have to
admit, most of our new stuff is developed in Clipper.
Anyway, just some additional comments I thought I'd throw into the mill.

mfg rudolf stricker
| Disclaimer: The views of this user are strictly his own.