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Dave,
I hate to disagree with you because I like your name. But if you're wrong, you're wrong. And you're wrong. :-)
This ATR exit is another LeBeau thing that makes no sense. First, you say: "Ok, I won't use a fixed stop or target since markets change over time..." Then, you proceed to set a fixed number of ATR's for your stop/target! Who says that swings in the S&P (or any other market) are still the same number of ATR's as they used to be? (They aren't - check into it.)
A fixed dollar stop/target is no different than the "exit after so many bars" exit. Neither has anything to do with the market. Neither has any concept of market movement behind it. Both are invalid means for evaluating systems and will show the same profitability percentage (as Tim M. pointed out) for almost any entry. Why is that? You're ignoring Tim M.'s initial finding...
If you want to see every time a certain setup's criteria are met, use a PaintBar. But don't think that changing your exit criteria to something artificial so that you get entries that you wouldn't have gotten makes your system testing more "realistic". It doesn't. All it does is create entries that would not have occurred had you been trading the system.
The Omega Man
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Dave DeLuca wrote:
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.
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