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The reason why I picked control theory to read up on is that
parts of it contain some important concepts about adaptive
feedback systems, such as open loop and closed loop feedback
systems. I strongly believe that the next step in trading systems
design will be adaptive systems. Some of those basic control concepts
are really key concepts for designing any adaptive system.
>>
An example would be a system where a key parameter is a function
of, say, volatility. Common knowledge and sense is this: when
volatility expands, you'll have to expand your price and contract your time
horizons which leads to increased risk and increase in profit potential if you
stick with the same parameter. When volatility contracts, you'll have to
do the opposite and leads to decreased risk and decreased profit, again
if you stick with the same parameter. A typical system usually creates
too many signals in either case resulting in a lot of junk trades.
An example of an open loop adaptive system in this case would be a system
where a systems parameter is dynamically adjusted by volatility. Volatility
becomes a reference var. for the parameter. This type does not have any
feedback - open loop. The key is the function that ties a parameter to
volatility, and obtaining this function is the most complicated of all...
An example of a closed loop system in this case would be a system where
a systems parameter is dynamically adjusted based on volatility through a
profit feedback.
The difference is the absence and presence of profit feedback.
Profit feedback loop in this case is simply comparing real profit with ideal.
The whole thing gets pretty complicated, the math is medium.
<<
However the goals are different. In control systems the goal is to stabilize
a plant/system and in trading it is to maximize profits ( match the real profit
to ideal, efficiency ratio ).
I did not buy any books on that because you can pretty much pick
any book on control theory and it will be the same, so I got
one from a friend. I am reading up on it in my spare time. Heavy
math and a lot of equations.
I am also reading up on this funny thing
called fuzzy logic. Again some of those fuzzy logic concepts
can be successfully applied to trading - linguistic variable for instance.
if volatility is "medium to high" then stop loss is "somewhat large";
if volatility is "very high"then risk is "high" ;
if risk is "high" then no new trades and exit all trades.
rule reduction and ease of use is obvious.
Someone needs to design some key adaptive concepts applied
to trading, develop flowcharts, algorithms, math etc.
Another key and rudimentary adaptive concept that I have picked up.
is the concept of a parallel function by Dr. J.Clayburg
( maker of Feeder Cattle system ).
As far as nonlinear dynamics and price, sure the price is non linear and resembling
fractals. But those theories will never explain price and all you can do, AGAIN,
is take some key concepts from those theories and try applying them to trading.
The results will show if it works or not.
Val.
tj wrote:
> i'm very familiar with control process technology and feedback loops,
> but unfamiliar with control theory and trading. val, how goes it?
>
> TJ
>
> --- The Omega Man <editorial@xxxxxxxxxxxxx> wrote:
> > You might also want to get with Val Clancy (of this list) and see
> > where he
> > stands on his applications of control theory. It seems to me that
> > there
> > might be some fruit in that area - more than in the areas described
> > in the
> > book below.
> >
> > Val - Did you ever select a control theory book to purchase? Which
> > one did
> > you decide on and how is it?
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