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Hi Andrew,
Let us just backtrack a bit. I noted, when coding the T3 and IE/2,
that the IE/2 appeared to be similar to the Theta model, which I know
to be a good model. So I did not bother to test it, assuming it also
to be a good model. The Theta model implementation provided is based
on what can be done in Metastock in a very short time span, and was
given on request, and has maybe too many shortcuts in it. If anybody
has ever tested the IE/2, I think we can safely use that as a proxy
for the Theta's performance and vice versa.
Now, since I appear to be the defender of the Theta model. We (yes,
I happen to be part of a team) use the Theta model extensively to
prepare short term forecasts of monthly data, such as M3, CPI,
wholesale trade and so on. We use it as part of an array of models
and we never use the results of just one model, but the Theta model
shines in this capacity as a good performer and often has a fairly
large dynamic weight allocated to it. Here performance is measured
in forecasting accuracy, which usually is a poor indication of
whether it will work in a trading environment.
But we also use this model, for end-of-day data, in a trading
environment as part of yet again a suite of models. This is quite
fashionable and dicated by theory as well - using a suite of models,
and I am in a way recommending this to the group and also recommending
the inclusion of the Theta in such a suite.
Now, let us not run away from the real point, testing the Theta model
as a singular trading model. I note your observation, as well as
that of some other members of this group, and can well believe it -
that the Theta did not perform well when you tested it.
This is true of prediction models in general, so allow me to expand a
bit. A good prediction model is supposed to predict where the market
will be in future, say tomorrow. Now, if it is a good projection
model, then it will be unbaised, so that the market will be above it
about 50% and below it about 50% of the time. The residual or error
for a good model will be random. So if we use a prediction model as
is, we are trading white noise, and should not get good results. So
we have to apply our minds a bit. I am thinking aloud, why is the
Theta not performing as I would expect, so please bear with me.
In our trading model, we do use the Theta model's prediction as well
as its slope. So we extrapolate the model and note the slope of this
extrapolation and we use both in the model. We have noted that when
the Theta long term line (theta = 0) turns, it often indicates a
turnaround in trend. This could be a better way to build a trading
model, using the slope of the long term component. The slope of the
extrapolation is in fact half the slope of the long term component,
since the extrapolated short term is constant and the Theta is
( lt + st ) / 2
so
d( lt + st ) / 2 = dlt / 2
since
dst = 0
Another note, we often take the log of the series before we calculate
the slope, but this should not make a big difference in many cases.
Anyhow, try the following test
linregslope(log(CLOSE),periods)
and optimise on periods. When this line goes above zero, buy, and
when below, sell. Please let us know the results.
Note that the parameter should be on the long side. It should
ideally be above 30 for a number of statistical reasons that I'd
rather avoid for now. I think a good starting point would be 50 days
and test up to at least 250.
Regards
MG Ferreira
TsaTsa EOD Programmer and trading model builder
http://tsatsaeod.ferra4models.com
http://www.ferra4models.com
PS : I *really* appreciate your opening sentence.
--- 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
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