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For a long term strategy, you really can't tell if things aren't working
until you've given the system a lot of time. As I recall, Mr. O'Shaughnessy
backtested strategies using over 40 years of data...maybe it was more.
Weren't there long periods, like maybe 5 years, were some very good
strategies didn't beat buy and hold? Just as no experienced system trader
would rely on only a year's worth of backtesting, it would be unwise to
judge a system's real time performance with just a year's worth of real time
trades.
As far as exceeding historical DD, I expect that to happen. But it sucks
when it happens right at the get go. If I really believe in my system, I
give it at least 2X historical DD and preferably 3X. Of course I shouldn't
be trading a system that I don't have complete confidence in. It takes a lot
of capital to play the futures game correctly. Of course the rub is that
many of us chose a leveraged game 'cause we wanted to grow a small stake
into a big stake pronto. We finally get it beat into our heads that you've
got to have lots of money to play with any decent chance of winning...but if
I already had lots of money, I wouldn't need to play! BTW, transaction costs
and contract size are the determining factors on how much money is needed to
have a chance of success.
All of what I said above is contingent on a decent robust model. Although
I'm sure many of you are smarter than I, my real money is currently being
bet on simplicity.
Scott Hoffman
Issaquah, WA
>Yes, I've read the interview. The question is- is he following the same
>strategy that he outlined in his book, or has the human in him caused him
to
>make changes to the backtested strategy? Since the fund I mentioned is 31%
>behind the S&P this year, which is worst year ever for this strategy (worst
>prior performance was 18% behind the S&P in 1975-this info comes directly
from
>his book What works on Wall Street which I have in front of me) you have to
>question the strategy.
>
>Futures traders know that when your realtime loss exceeds your largest
>historical loss, as in this case, it's time to reexamine your system. By
the
>way and not to knock O'Shaughnessy, I enjoyed the book and his well thought
>out backtested approach. It's just that backtesting and assumptions that
are
>made by the backtester can amount to curve fitting. I know from my own
>backtesting of trading systems how easy it is to be lulled into thinking
that
>you have just found the holy grail, when the system falls apart in
realtime.
>Larry Williams tells a story of a great bond system he discovered,
backtested
>it using over 1000 out of sample trades where it performed very well. It
>couldn't make a dime in realtime!
>
>All I'm trying to do in inject a note of caution in the reading of
backtested
>results from someone who has been burned by it.
>
>Howard Bernstein
>
>
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