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Kevin,
Yes!! …you're exactly right. The actual reason I said in a subsequent post
to Brad that “I didn’t want to hold up geostatistics as particularly having
any direct relevance to trading” was precisely for that one. A mineral
deposit is a *static* stochastic system, whereas trading involves a
*dynamic* stochastic one.
It's really a case of "interpolation" (filling in the gaps for something
that already exists, when you only have some of the data) versus
"extrapolation" (looking into the future to predict something that doesn't
yet exist).
By the way, I shouldn't have used the term geostatistics. I was talking
classical stats, whereas "geostats" usually refers to the application of the
Kriging interpolation process (which, rather thankfully for all of us, I
didn't get into). For more info, and a healthy bit of skeptic realism, check
out:
www.geostatscam.com/index.htm
It was a complete tangent really... but made for a different reason than to
provide an "analogy". I shouldn't really have tried to draw any parallels at
all like I did in the first post - that bit was beside the point. I just
(mistakenly, it turns out) thought that jawjahtek was dismissing stats out
of hand and wanted to provide some food for thought that it does have some
real world application. Classical stats (and geostats) can be, and is, used
as a foundation to build mines. That's all...
If it's a relevant analogy you're after then perhaps the mineral processing
plant is a better one. The random variable is still the grade of the ore
(which has been mined and stockpiled ready to feed the plant), but the
system is dynamic as there is a time-series variable involved, i.e. there is
a mean grade of ore on the stockpile but variation in the grade (hopefully
about the mean!) over time as that ore is fed into the plant. Again stats
are used to help the engineers predict what is coming...
Blimey, now I come to think of it...have I cracked it? All this time and all
I needed to do was 'phone a friend'?! I'll keep you posted!!
And don't worry... for every engineer vs. trader gag you can think of I can
tell you three geologist vs. engineer ones!
________________________________________
From: Metastockusers@xxxxxxxxxxxxxxx [mailto:Metastockusers@xxxxxxxxxxxxxxx]
On Behalf Of Kevin
Sent: Monday, July 04, 2005 11:24 AM
To: Metastockusers@xxxxxxxxxxxxxxx
Subject: Re: [Metastockusers] Stationarity and Real World application of
statistics
Teclogio,
A very interesting tangent indeed. However, I must disagree with your
analogy. As far as mining is concerned, surely the 'unknown quantity' of ore
that you are attempting to estimate will remain static for years to come
regardless. However, future prices are dynamic and can, and will, be moved
by an act of terrorism, a chance remark by the Fed, an interest rate change,
etc., etc., etc. I can't see that the 'dirt' that you've previously taken
out of the ground and modelled any which way is going to help you much.
Uh-O, I see a run of Engineers v. Traders gags coming on.........
Regards,
Kevin
At 12:21 02/07/2005 +0100, you wrote:
>Engineers agree with Mark Twain: there are lies, damn lies, and then there
is statistics
Err&sorry, but that is a slightly misplaced quote. Yes, Mark Twain said it
and yes it can be true when statistics are deliberately used to mislead
people as in the way politicians regularly use them. But engineers&? I know
you are one, but I would like to venture a bit of personal experience that
may persuade you and others interested in how statistics are regularly
applied in a Real World application that you may not have considered before
now. Perhaps that may then help you shed a more favourable light on the way
stats are applied in the world of trading.
In my previous life I was a geologist working for a large mining company. My
claim to fame in that area is that I was on the (small) team that was
responsible for one of the more significant gold discoveries of recent years
(for those interested, the Geita deposit in Tanzania&now belonging to
Anglogold-Ashanti). So, the point here is that I have some experience in
using statistical modelling&namely in the practical application of
geostatistics .
Geostats is nothing fancy&it s just the name given by geologists to the
practice of determining the size and internal grade distribution of an ore
body using statistical methods. Basically one has a limited data set of
samples from drill holes and uses that to come up with a 3-D model of the
ore body and the distribution of metal within that body&and then to put
levels of statistical confidence in that model. Those levels of confidence
determine (usually within industrial standards) how much more, if any,
drilling is required to satisfy the *mining engineers* that what you have is
not just a mineral deposit but an ore body (the former is just metal in the
ground, whereas the latter can actually be mined economically).
Mining engineers know that this is only a model. They know that it is not
100% fact (as the only way to determine that is to actually mine the thing).
They know the statistical confidence levels and therefore they know that
there are likely to be some errors in the model. This means that when the
miners actually come to take the gold out of the ground there will be less
in some places and (more pleasantly) more in others. And yet, look at what
happens&capital flows, mines get built, people get employed, dirt gets
shifted, metal comes out of the ground. And all that hangs on a few
statistical inferences made by a bunch of Neanderthal geologists. Not bad,
eh?
So there is no question of lying . To do so would involve not only gross
professional negligence on behalf of the geologist, but it would mean that
everything that else that normally follows would fall apart&usually long
after all the capital has been spent and the people have been employed, i.e.
when it s far too late. Also, in the case of deliberate scams like Bre-X,
the use of geostatistical lies can affect the whole industry.
Now, with all that said, you might be surprised to find that the principle
of stationarity is relaxed almost to the point of irrelevance in
geostatistics. Nature is a wonderful thing, but it rarely conforms to simple
mathematical models and so, skipping over the jargon, we basically find that
we have to make some pretty sizeable assumptions and generalisations when
coming up with the models. Are we lying when we bend the rules so? I don t
think so&we are not agreeing with Mark Twain at all. He was implying, I
think, that statistics are determined and then manipulated for an ulterior
motive. That is different from honestly recognising, discussing and then
trying to work around the limitations of the practice&
All this has direct implications to the world of trading. I ve already gone
on too much so I ll only say now that you can draw two direct parallels
between geostats and trading stats (Tradstats??!!). One is that there is a
known quantity&the drill hole data is dirt already taken out of the ground
and analysed - this compares with the historical data set in trading. The
second is that there is an unknown quantity that you want to estimate, or
model&the very sizeable un-mined bits of the deposit between the drill
holes(!) and the future data in trading. The only problem I can think of
there is to do with continuity. The drill hole data is not spatially
continuous in 3D, whereas the time-series trading data is. Oh well, that s
not relevant&what I m trying to say is that you should not confuse
statistical modelling with any sort of holy grail . Perfection does not
exist when dealing with models, as any experienced mining engineer will tell
you&but that doesn t mean in any way that a good model will not help in
getting the job done. And engineering is, after all, about getting the job
done.
Hope that s helped open your mind a bit?!
________________________________________
From: Metastockusers@xxxxxxxxxxxxxxx [mailto:Metastockusers@xxxxxxxxxxxxxxx]
On Behalf Of jawjahtek
Sent: Friday, July 01, 2005 11:07 PM
To: Metastockusers@xxxxxxxxxxxxxxx
Subject: [Metastockusers] Re: New Adaptive Tools for Metastock
Random question and comment:
1. Superfragalist, have you tried CSI data (assuming you use EOD data)?
There is no such thing as a good data provider, but at least CSI is
honest and up front about continually cleaning their data AND telling
users what errors were made. If you use intraday data, I can see how
you have been hosed. The only option that I have seen is to match the
professional set ups: use multiple intraday suppliers.
2. While I wish the developers of the new adaptive tools all of the
luck in the world, I don't believe that ANY application of
Communications (Signal) theory can be successfully applied to price
data. In academic terms, these theories require Stationarity. In
layman's terms, this means that the theories require a constant range
of frequencies (cycle) and phases (time lag). Unfortunately, historical
price data tells us nothing about the future prices' frequency and
phase.
Statistician's definition of Stationarity: a statistical name for
expressing degrees of invariance in the properties of random functions;
it refers to the statistical model, and not to the data. Most commonly
used to indicate invariance in the mean and variance, but also in the
variance of first differences.
I am an Electrical Engineer. Although EEs use the concept of
Stationarity, its meaning is slighly different in engineering.
Engineers agree with Mark Twain: there are lies, damn lies, and then
there is statistics.
I will try the free trial, but I already know that the holy grail does
not (and cannot) exist.
jawjahtek
--- In Metastockusers@xxxxxxxxxxxxxxx, "superfragalist" <jackolso@xxxx>
wrote:
> Well, I've got all those IVs hung off my wallet also. Reuters at least
> cleans their data, which esignal doesn't do. In fact, esignal can't
> even adjust for splits.
>
> I didn't know netflix had DVDs on trading. I've just been trading DVDs
> with them.
>
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