Re: Limited life span of mechanical systems?

["Kent Rollins" <kentr@xxxxxxxxxxxxxx>]

One thing to consider is how much data you developed the system with to
determine MaxDD.  If it was 10 years and the longest DD was 9 months, that
might no be so bad, but if it was 3 years and the longest DD was 9 months,
I'd go back to the drawing board.

One thing you can do from the get-go when developing a system is build in a
rule to only take trades when the system's equity curve is above a moving
average of it's equity curve.  This way, when the system goes into a
drawdown, it will stop itself.  Of course, this becomes another parameter
that you must consider when deciding whether you've curve fit something.

Best answers: 1) test on as much data as possible, 2) don't scale too
aggressively, 3) trade multiple non-correlated systems, 4) be sure you have
enough capital to survive MaxDD * 2 and still eat.

Kent


----- Original Message -----
From: "David Folster" <mr_bond@xxxxxxxxx>
To: <omega-list@xxxxxxxxxx>
Sent: Saturday, July 13, 2002 12:02 PM
Subject: Limited life span of mechanical systems?


I have heard from several of the most experienced traders on this list, both
privately and publicly, about how "mechanical systems don't work forever"
and how you have to re-evaluate them as time goes on, etc.  I am definitely
not an expert on this subject, but I would just like to question this point
a bit further.

How do you know when your system has stopped working?

This just doesn't make any sense to me.  What criteria do you use?  Wouldn't
it be too late by the time you figured it out?

Once Mark Brown posted to this list that his best ever bond system in the
world had longest historical DD of 9 months.  So, what then, your system has
stopped working if your DD goes for 10 months?  A year?  What if you decide
to stop trading it and then the system turns around to have a gigantic
runup?  To me, this whole idea seems analagous to trying to trade a
mechanical system while at the same time second guessing it and trying to
cherry pick only the best trades.  You end up taking the losers and missing
the winners, no?

Perhaps the more experienced traders on the list can speak to this question.
Not trying to criticize, only to learn.

Thanks,

David