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Hi Herman,
Your described approach is very methodical, and you are raising some good points about the
pitfalls.
>From the point of view of just another user, I think that all approaches will show one shortcoming
or another when viewed critically. However, a combination or summation of many approaches gives
me a certain comfort level that I find hard to trade without.
I will use the same approach that you outline below, but I will start my in sample and out of
sample testing differently.
I start by looking at a certain market, and trying to break that up into pieces with different
character, e.g. trending, trading range, reversing, etc. So, if I'm trying to build a reversing
system using an oscillator(s), I'll want to select those segments of the market that are reversing
or trading in a range. Assuming I have enough bars, I can break those into segments for in and
out of sample testing.
Once I've found a successful approach to the specific character of that market, I can expand my
testing to a larger portion of the historical data, but I'll need to find a way to turn the system
on and off depending on what type of market behaviour is being exhibited. Then I'll run this
overall system against the larger data set, in much the same manner as you describe below.
Yes, it's somewhat redundant and misleading because I'm reusing the same data, although on an
expanded scale.
If this works successfully on a market (or a specific security), I can make life easier by testing
this approach across a portfolio. Certain markets are more likely to behave a certain way, more
frequently, for a longer duration. In other words, my system will test better on those markets
which tended to have greater periods of reversing or or trading range behaviour, for example.
Taking the S&P futures, you'll see this market is very choppy and tends to reverse a lot. It
*WON'T* be a good choice for a trend following system, but may well be a good choice for my
example system approach.
A personal belief of mine is that market behavoiurs are persistent. The S&P is much more likely
to continue it's reversing behaviour in the future. I'm fairly confident that next month, it
won't become a trendy market.
So by choosing those markets that have worked well in the past, I feel this improves my chances
for a system to work well in the future.
A sidenote here is that I'm making certain assumptions about basic system design. I subscribe
heavily to the signal / trigger approach as well as Chuck LeBeau's methods for developing robust
systems. (www.traderclub.com) I really like adaptive rather than fixed approaches. Also, you'll
notice that markets look very different depending on the timeframe: comparing a 3 minute chart of
the S&P with a daily chart is a good example.
Just some somewhat random ideas to go with your thoughts....
Dave Nadeau
Fort Collins, CO
--- Herman van den Bergen <psytek@xxxxxxxx> wrote:
> My system development sequence has always been (and I believe many others
> work this way too):
>
> 1) Performe my first System Tests on historical data preceeding 2001.
> 2) If the results look promising, I would perform a system test on more
> recent, 2001 data.
> 3) If that looks good too I may assume my system to be valid and continue
> work on it, if not I modify the system and start all over again.
>
> So, each testing phase includes extensive historical testing. Isn't this
> like putting the cart before the horse? After all, if my system doesn't
> make money during the most recent six months, why would I be interested to
> learn whether it earned money a long time ago? The fact is that if it
> didn't show profits in recent months I am not going to use it no matter how
> good it appeared to be in the past. Would you?
>
> So, unless somebody can straighten me out, I'll be, from now on, testing my
> systems on recent data first and then, only if it shows profit in recent
> months, will I verify it's performance on historical data to get to know
> the system better.
>
> Looks like this will save me a lot of time... right or wrong?
>
> Happy development!
> Herman.
>
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