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The comment on gambling and sin was ment to bring a smile to your
faces, if it fails to do this, please just ignore it.
To return to the original topic, I've given three methods to check for
statistical validity of parameters of a trading system
1. 30 + degrees of freedom + a bit extra
2. use a hold out, chop off the last 20% or so and test it on this
3. break the sample in bits and build it on randomly selected bits,
then test it on the rest
Of these, only #1 directly applies to the question asked, how many trades.
I want to add another technique:
4. plot and investigate the equity line
This is quite revealing, try to get an upward sloping one. If it
spikes up in say the 80s and then stays high, but does not get higher,
run away from the system as it overfitted to some trade opportunities
in the 80s and does not work anymore. We quantified a method to check
for an continually upward sloping line which is another story.
You can do 4 along with all the rest, in fact, you can combine all of
these.
Superfragalist, you obviously don't like these methods, but I am not
entirely clear why not, apart from the fact that #1 will not like a
9-trades-in-20-years strategy. Maybe you can shed some light by
giving us a suggestion of :
> > how many trades the evaluation needs to be
> > sound
> > statistically?
Regards
MG Ferreira
TsaTsa EOD Programmer and trading model builder
http://www.ferra4models.com
http://fun.ferra4models.com
--- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
<andysmith_999@xxxx> wrote:
> 90% of traders don't know what they are doing. Much of the remaining
> 10% are professional traders.
>
> 90% of gamblers don't know that they are doing. Much of the remaining
> 10% are professional gamblers (which includes the gaming industry).
>
> No difference yet.
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, mgf_za_1999 <no_reply@xxxx>
wrote:
> > If your system trades 9 times in 20 years, either give the money to
> > some index manager, or put it in the bank. You are not trading, you
> > are buying and holding or investing. If you add any conceivable
> > gearing then either you will run out of margin, or pay through your
> > ears in carry over the 20 years with just 9 trades.
> >
> > Anyhow, 9 trades in 20 years sounds academic to me - 30 trades plus
> > degrees of freedom sounds practical to me.
> >
> > I do use such long term, 9-trades-in-20-years systems to extract the
> > long term trend from a ticker. But I do not use that as a trading
> > decision - just as part of the input.
> >
> > Yes I agree with you, trading is not investing. But I certainly don't
> > think trading is gambling. It is gambling if you don't know what you
> > are doing, probably with much worse odds than you'd get in a gambling
> > house. Trading is buying and selling of financial instruments with a
> > view to making a speculative profit while gambling is statistical and,
> > given the odds, a sin!
> >
> > Regards
> > MG Ferreira
> > TsaTsa EOD Programmer and trading model builder
> > http://www.ferra4models.com
> > http://fun.ferra4models.com
> >
> > --- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@xxxx>
> > wrote:
> > > 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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