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Jay Mackro wrote:
> How can we be confident that as a backtest extends
> further back in time that the characteristics of
> the data are representative of the environment in
> which the system will be trading in real-time?
Tony Hass responded:
> Good question...I have no immediate answer...maybe
> Pierre or Bob Brickey could comment.
We never can be totally confident, but we can have a degree of confidence.
If we find a trading method that has worked consistently many times a year,
year after year for many years, we have a reasonable basis to think it
likely will work about the same next year.
Why do you expect the Sun to come up each morning? You may expect it in
part, because you have been told the Earth revolves every twenty-four hours.
However, years ago people didn't know that. Even so, they expected the Sun
to come up each morning.
They had that expectation, because the event had happened so many times
before, not only during their own lives, but in stories passed down from
ancestors. They had a reasonable basis to expect the Sun would continue
coming up each morning, only because it had happened so many times before,
not because they understood why.
The same is true of market patterns. If we find something that has repeated
a very large number of times, we have a basis to expect the pattern to
continue. The more times it has repeated, the greater the probability it
will continue.
Of course, there always is risk that no matter how many times something has
happened, it may not happen again. It is a common belief that the markets
are much different now than in the past. My research shows that is largely
untrue.
Have someone show you two unlabeled stock price charts, one from the last
century and one that is recent, and try to tell which is which. Run any
kind of test you want. You only will be able to guess.
Maybe market trading will be mysteriously different next year. Maybe also
the Sun will stop coming up every 24 hours. Maybe the Clinton sex scandal
will change the rotation of the Earth, so days will become 33 hours long.
Anything is possible, but the "smart money" will be on well-established
previous patterns continuing.
-Bob Brickey
Scientific Approaches
sci@xxxxxxxxxx
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