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[EquisMetaStock Group] Re: Theta model



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Sebastian, you've nailed it right on the head.

Mathematical formulae & theoretical models by themselves, seldom (if 
ever) translate into a winning strategy.

A fine example of this was the spectacular collapse of the Long-Term 
Capital Management Hedge Fund in 1998.

Here we had some of the brightest (Nobel prize winning) minds, 
utilizing models based on a lot more than just a simple indicator, and 
yet the fund collapsed due to (amongst many reasons):

1) Failed to model risk appropriately;
2) Failed to stress-test models;
3) Failed to consider liquidity a risk factor;
4) Failed to factor in unexpected correlation or the breakdown of 
historical correlations;
5) *Failed to combine trading models with judgement & experience.*


Observation of recurring market behavior, and translating & automating 
these observations into code, is the correct way to develop any worthy 
trading strategy.
Doing this back-to-front, whether by optimization or applying ethereal 
logic to mathematical models, is an invitation to financial disaster.


jose '-)
http://www.metastocktools.com



--- In equismetastock@xxxxxxxxxxxxxxx, sebastiandanconia <no_reply@xxx
.> wrote:
> 
> 
> I just got finished testing 12 years of Nasdaq and SP500 Index data 
> and 10 years of SP600 Small-Cap Index data (long only) using the 
> Theta model supplied.  The result for all three indices was a 
> dramatic underperformance of a straight buy-and-hold strategy.  In 
> fact, T-bills would have outperformed.
> 
> JMO, but I think that the use of formulas in trading/investing is 
> widely misunderstood and misused.  First, you need to come up with a 
> recurring market behavior and you have to understand why the market 
> behaves that way.  Then, you use a mathematical formula to TRANSLATE 
> what you've observed into language a computer can understand so that 
> you can test your idea and see if it is worth anything.
> 
> Simply applying an arbitrary formula to market data as if it was all 
> randomly generated and with normal distribution isn't logical, 
> because the markets aren't random:  They're the results of
> repetitive group behavior.
> 
> 
> Luck,
> 
> Sebastian
> 
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "Andrew Tomlinson" 
> <andrew_tomlinson@xxxx> wrote:
> 
> Let's keep this within the bounds of polite debate.  MG, I've tried 
> a couple of backtesting runs with this on the S&P and on baskets of
> stocks, over 5,10 and 15 year periods, and show losses consistently.
> Perhaps you could give us an example of the operation of the system
> in practice and the securities that it can be used on, so we can
> verify? It doesn't have to be your most tuned, proprietary version,
> but enough to demonstrate that there is some verifiable substance
> here. 
> 
> Andrew
> 
> -----Original Message-----
> From: Jose [mailto:josesilva22@x...] 
> Sent: Tuesday, March 01, 2005 9:04 AM
> To: equismetastock@xxxxxxxxxxxxxxx
> Subject: [EquisMetaStock Group] Re: Theta model
> 
> 
>> Well, we have a couple of clients putting millions of real ZAR
>> into this simple model, in real trades, making real money....
> 
> RG, I hope you are on a commission basis with them.  ;)
> You should be doing quite nicely by the sound of things.
> 
> 
>> Many central banks nowadays utilise a suite of models rather than
>> just a single model as they did just a couple of years ago.
> 
> I'm really curious now... which central banks are these, which 
> trading models do they utilize, how do they apply them, and how do
> you know about them?
> 
> 
>> One where the exponential decay weight is optimised for.
>  
> I'm stiil curious as to how you optimize your EMA.
> 
> BTW, you keep mentioning "we" & "us".  Are you part of a large 
> development team?  I envisage a team of modeling scientists & 
> mathematicians, all in their white starched apparels, pouring over 
> countless model backtests on "extensive databases".
> 
> 
> jose '-)
> 
> 
> --- In equismetastock@xxxxxxxxxxxxxxx, "MG Ferreira" <quant@xxxx> 
> wrote:
> 
> 
> Well, we have a couple of clients putting millions of real ZAR 
> into this simple model, in real trades, making real money....
> 
> OK, in all honesty, this model is part of a huge array of models 
> that we use, for real clients, trading real money etc etc, but it is
> a significant part of that array of models.
> 
> Apologies for the theory, but a lot of recent research has made 
> it clear that one should use a suite of models, not just one.  We 
> have devised all sorts of pratical ways to, in a theoretically sound 
> manner, combine the results of many different models into something
> that leads to sound decision making in the real world, but does
> not shy away from the theory or the intricate implementation
> required to make it work in practise.
> 
> But don't just look at us....  Many central banks nowadays 
> utilise a suite of models rather than just a single model as they
> did just a couple of years ago.  A lot of the jargon comes from
> central banks' modelling teams.  The theoretical and practical
> reasons for this are  many.  Some models work better in the short
> term, some in the long term, some are better for cyclical markets,
> some for trends.  Some give you target levels, some models provide
> extreme values.  The theta model that I am sharing with this group
> is an amazingly simple model that proved itself (don't believe me,
> read the article) in a variety of applications and for a variety of
> time series.
> 
> I think it has relevance to the real world of trading and was 
> requested by members of this real world group to provide code for 
> it.
> This I did, for your viewing pleasure and perusal - a right, 
> which I note, you are exercising to the full.
> 
> Regards
> MG Ferreira
> TsaTsa EOD Programmer and trading model builder 
> http://tsatsaeod.ferra4models.com http://www.ferra4models.com
> 
> 
> --- In equismetastock@xxxxxxxxxxxxxxx, "Jose" <josesilva22@xxxx>
> wrote:
> 
> MG,
> 
>> One where the exponential decay weight is optimised for.
> 
> Optimized to what, equity curve, market cycles?  Curve fitting, 
> maybe?
> 
> 
>> Of course it works.  In a scientific study, referred to before,
> 
> The real question is, does it work in the *real world*, with *real
> trades*, using *real $*.  Or is it just another paper study/theory, 
> dressed in quant jargon, with little or no relevance to the real
> world of trading?
> 
> 
> jose '-)






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