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Your premise is from a purely mathematical view, specifically
statistical. However, the market doesn't always supply data in a
complete packages ready for statistical testing and inference.
Suppose we have a market timing system that has made only 9 trades in
the last 20 years and all of the trades have been highly profitable.
Do we use the system or not? There are not enough trades to validate
the results.
We can wait another 40 years or so and we'll probably have enough data
and enough trades to make statistically meaningful inferences.
None of this is neat, precise or absolute. And there are no hard and
fast rules for how many trades a system needs to give good test
results. There are approaches which are better than others like this
one by MG, but there is no one correct answer to the question.
After many millions of systems tests and a lot of trading years in the
markets, no one has come with a trading system, a timing system or any
other system that works consistently over long periods of market history.
Trading is not investing, it's gambling with an edge to the player if
the player is an expert at that game. However, the house is always
changing a little something here or there that changes the
probabilities of events just enough to change the game. It's the
players job to stay up with these changes and adapt well enough to
keep the edge on the house.
Newbie's just don't get how long it takes and how hard it is to get
the edge consistently and over long periods of time. A newbie thinks
if they make money one year, they're going to be a successful trader
every year. Call me in twenty years with your track record and if it
measures up, I'll send you your certificate of validation.
--- In equismetastock@xxxxxxxxxxxxxxx, mgf_za_1999 <no_reply@xxxx> wrote:
> The 30 trades is based on the central limit theorem - after about 30
> observations things settle down if the mean of random samples follows
> a normal distribution. There are several assumptions in this
> approach, but it should give a good idea. I'd push it up a bit, say
> to 35 or 40. Also, you need to adjust for degrees of freedom if you
> do any optimisation. Suppose your system is driven by 1 parameter,
> then you must add this to the 30. Suppose you have a big system that
> uses say 10 parametrs - then you need at least 40 trades. Especially
> if the system gets bigger, it needs more trades to give any
> confidence, and I will feel better if such a system produced good
> results in 50 or more trades.
>
> Another, excellent way to test is to use a hold out sample. Build the
> system on a portion of the data, say an 80% sample. Then test it on
> the rest and you can see if you have a winner or fools gold. The
> *proper* way to do this is to segment the sample in say 10 blocks (of
> 10% of the data each). Now you choose randomly any 8 blocks, optimise
> the parameters of the system on it, and test it on the remaining 2.
> Then you choose another 8 blocks randomly, optimise the system, test
> it on the remaining 2 and so on. After you've done this say 100
> times, you test the results.
>
> For this you need special software - one good example can be found at
>
> http://weka.sf.net
>
> In practise, just chop off the most recent 20% and you'd get a good
> idea if the system will work or not.
>
> Regards
> MG Ferreira
> TsaTsa EOD Programmer and trading model builder
> http://www.ferra4models.com
> http://fun.ferra4models.com
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "rvalue1" <rvalue1@xxxx> wrote:
> > I would contend that if you generated >30 trades in the up direction
> > for a sufficiently long period 2 years or so, you would have
> > confidence that the system does well in the up direction. Same for
> > down and catch the sideways as it transitions. Very unusual to find
> > a great system up, down and sideways!! If you have one, let me know.
> >
> > If you are waiting for 1000 trades, you must trade very often.
> >
> > --- In equismetastock@xxxxxxxxxxxxxxx, "Ed Hoopes"
> > <reefbreak_sd@xxxx> wrote:
> > > I recently attended a lecture by Keith Fitchen, the author of
> > several
> > > successful trading systems most notably Aberration. He says that
> > > statistics on more than 1000 trades must be compiled before the
> > > results can be considered valid.
> > >
> > > Ed Hoopes
> > >
> > > --- In equismetastock@xxxxxxxxxxxxxxx, chichungchoi <no_reply@xxxx>
> > wrote:
> > > > Does anyone know how many trades the evaluation needs to be sound
> > > > statistically?
> > > > Thank you in advance
> > > > Eric
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