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I can absolutely see the advantage of trading using a suite of
methods, as you put it. During market panics all asset-classes
except cash will correlate, so diversification doesn't work when you
need it the most. Using different trading methods at the same time,
though, can give you a higher level of diversification and risk
control. That part I understand.
But I'm still not seeing the advantage to the Theta model. The
Linear Regression Slope Indicator in MS is simpler and works better
all by itself in a wide variety of periods. I'm very skeptical of
complex methods, especially when there are multiple layers of
complexity added on. Either they aren't robust or they don't make as
much money as simpler methods.
I'd love to be proven wrong, though.:)
Luck,
Sebastian
--- In equismetastock@xxxxxxxxxxxxxxx, "MG Ferreira" <quant@xxxx>
wrote:
>
> 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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