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I found the testing method used by LeBeau difficult to evaluate. What if the entry signals look great with a 10 day exit, but
terrible with the others?
What I like to do is use a fixed money management stop against a fixed profit target. For example, test a system using a $1000 mm
stop and a $1000 profit target and examine the percent winners. Consider 50% to be no better than random. If you are building a
trend following system then adjust the ratio, say a $500 mm stop vs. $1500 profit target. Now the random mark will be 25% winners.
If it is significantly higher you might have something.
The size of the fixed dollar stops and targets can be selected for each market depending on the market's contract value and normal
trading range. But if the market's volatility changes significantly over the testing period (as in long-term back-testing of the SP)
fixed dollar stops and targets are going to be misleading. In these cases I find it is better to use a method for measuring the
average trading range in points and set stops and profit targets as a percentage of the average true range measured over the last 25
bars. For example -
Vars: Atr(0), RiskTgt(0), ProfitTgt(0), MP(0),
RiskFactor(0.5), ProfitFactor(1.0); {2 to 1 profit to risk ratio set here}
Atr = Average(TrueRange, 25);
RiskTgt = RiskFactor * Atr;
ProfitTgt = ProfitFactor * Atr;
MP = MarketPosition;
if MP = 1 then
begin
ExitLong at EntryPrice + ProfitTgt limit;
ExitLong at EntryPrice - RiskTgt stop;
end
else if MP = -1 then
begin
ExitShort at EntryPrice - ProfitTgt limit;
ExitShort at EntryPrice + RiskTgt stop;
end;
What I am looking for is a simple validation of the entry signal. What is the probability that this setup will generate more profits
than losses? The results are much easier to evaluate - "there is a 42% probability that this signal will make twice as much as it
loses..." - not bad. Ignore the actual profits and losses in dollars.
This method has some advantages over testing with programmed exit signals, especially in trend following systems. For one, it
exposes a lot of entry setups that are hidden in those big trades where the system is letting the profits run. I want to hit every
setup in the data and see how it turns out. Anything else is over-fitting imo.
Dave
Tradeworks Software
Get a free random trade generator at http://www.mechtrading.com/tradestation/random.html.
> -----Original Message-----
> From: Tim McCaughey [mailto:TimM@xxxxxxxxxx]
> Sent: Sunday, September 26, 1999 6:11 AM
> To: Omega List
> Subject: testing entries for a trend following system
>
>
> I was wondering if some of the more experienced system designers might be
> able to share some of their experience with a novice.
>
> I have been testing some entries for a trend following system that I have
> been working on. I have been using the testing method that is described in
> the Chuck LeBeau book. That is simply exiting the market after 5, 10, 15, 20
> days.
>
> I have been using 5 years of data, daily bars, across 6 markets
> (Oil,Gold,eurodollars,Yen,T-Bonds,Wheat) using a large number of different
> entries.
>
> What I have found is that most of then come out with % profitable of Between
> 56-59%. This figure represents the average % profitable for all of the
> markets for all of the time frames(average of 6 mkts * 4 times frames = 24
> results per entry). I have been getting 5-15% variation between markets and
> time frames for each entry but the average of all these is remarkably
> stable.
>
> Considering the different techniques I have been employing I have found the
> low variability between entry methods very interesting. Is this because I am
> unintentionally testing the same idea expressed a different way or is this a
> common experience.
>
> thanks in advance
>
> regards
>
> Tim.
>
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