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Phil wrote:
> Lately I've been looking at some long-term things with the SP. Trouble is
> back in the early 80's the market moved maybe 1 or 2 points on a given day,
> whereas today it can move 20 - 30 points with ease.
<snip>
> I was thinking of calculating a "fake" margin number that would be
> proportional to today's figure scaled down by the ratio of the volatilities
> then versus now.
This is very important to compensate for in backtesting. Many people
blow it when they do long-term testing of the SP by just trading a
constant 1 contract. What I do is set margin, slippage and commission to
zero. I also set the big point value to 1 so results are in SP points,
not dollars. Then I tell the system to trade more contracts when
volatility is lower. I use average true range but any volatility
measurement will work. For daily data....
cts = factor / xaverage(truerange,100);
if whatever then buy cts contracts;
if whatever then sell cts contracts;
Set factor to some number that makes sense. A factor of approx. 200
would have you trading 10 contracts now and more in the past. Then just
divide your system results by 10 to get the numbers for 1 contract
adjusted to the current level of volatility. Manually add/subtract
whatever seems appropriate for slippage and commission on a per-trade
basis.
Cumbersome but it works and it gives you a *much* more realistic number
for that all-important max drawdown.
--
Dennis
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