How to determine if strategy entry criteria beats random entry

Truth_ said:
You appear to have been offended by my post. Please accept my immediate, and genuine apology without any reservation.

I was mentioning things of a general nature for the benefit of anyone who happened to read the thread. I did not mean to infer that your knowledge was deficient, or to demean you, in any way.

I have no idea of your level of knowledge, on any subject at all, and know nothing about you at all. It would be irrational of me to say something for, or against you, when I have no information.

So again, please do not feel offended by my post, and I apologize for anything that you found offensive. In the future I shall try to be clearer in my word choices, especially where I mention something of general information and not directed towards an individual.

Writing longer posts, without my taking adequate time to review, and consider how different people might interpret them emotionally, is also an error. Another item on my list of things I should work towards remedying.

I hope you have an enjoyable weekend and a successful upcoming week of trading.
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I appreciate your posts, comments and counsel.

Hope you hang around so some of us can learn from you.

Regards,
 
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a VERY quick primer:

Normal/Gauss: symmetric, two parameters

logNormal: BIG positive (right-hand) leg, so that $0 can close the other (left-hand) side

Pareto: in shape, the opposite of logNormal

Weibull: "Anyway you want it, that's the way you need it....!" 4 parameters...
and with those parameters, you can get pretty close to a perfectly symmetrical Normal,
to a skewed logNormal,
to a skewed-the-other-way Pareto,
all to your (or your underlying's) taste.....
 
Truth_ said:
You appear to have been offended by my post. Please accept my immediate, and genuine apology without any reservation.

I was mentioning things of a general nature for the benefit of anyone who happened to read the thread. I did not mean to infer that your knowledge was deficient, or to demean you, in any way.

I have no idea of your level of knowledge, on any subject at all, and know nothing about you at all. It would be irrational of me to say something for, or against you, when I have no information.

So again, please do not feel offended by my post, and I apologize for anything that you found offensive. In the future I shall try to be clearer in my word choices, especially where I mention something of general information and not directed towards an individual.

Writing longer posts, without my taking adequate time to review, and consider how different people might interpret them emotionally, is also an error. Another item on my list of things I should work towards remedying.

I hope you have an enjoyable weekend and a successful upcoming week of trading.
More...


Hey,
Not offended. I just think you missed the point of what I was saying. There is a difference between building a trading model with underlying assumptions on price distribution and checking to see if two distributions are different. I know a lot gets made of the fact that return distributions aren't log normal. I get why. But for some things using the assumption that they're log normal simplifies the math and is good enough. That being said, if someone is worried about it there are ways to test that don't require a normal underlying distribution and they don't take any extra time to run if you're using most stats libraries.
-J
 
fan27 said:
Let's say for the sake of an example, I have a strategy which yields 500 trades over a thousand stocks. The entry criteria is some price related pattern and stop and limit orders are placed 2 x the Average True Range away from the entry price. Assuming the strategy result metrics look good, how do I know the entry criteria is better than random entry?

One idea I had was I could randomly pick entries in the stocks that had signals and use the same exit criteria. For example, if stock ABC had 5 signals, I would randomly pick 5 entries in ABC and continue for the rest of the stocks. I could run this simulation 100 times and see how many of those runs my original strategy outperformed. If it beats more than 90 or 95 of those random entry runs, then I likely have an edge.

Are there other approaches that are more robust?

Thanks
fan27
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You can always run MonteCarlo.
 
I like to run a system on each stock individually, (same patameters) rather than 1000 stocks and see how the equity curve of each stock over time compares to the stock itself over time.
Filter the good and bad in general.

Random seems to work in trend. I can prove this to myself by selecting each bar for entry and testing a wide range of time stops relative to entry bar with a wide price stop loss. Everything seems to work ok until applied counter trend.
This is Geico. Everyone knows that!
I do wonder that discretionary market selection is underrated. Seems to me to be a real skill.
 
Interesting article Truth_. :thumbsup:

What is amazing is random trading produced the least volatility meaning higher risk adjusted returns? Of course all methods produced positive outcomes because of the upward bias of the indices but random trading producing the least volatile returns! o_O

I have to do some backtest myself to believe it.
 
So far I am using machine learning to test hundreds or thousands or feature combinations which can result in tens of thousands of different strategies. I do this on just a few tickers. From there I retest the strategies I am interested in based on performance metrics on a greater universe of stocks. This is all automated. I might start with 18,000 strategies and end up with about 20 or 30 that look interesting. This whole process takes about 15 seconds. Now I am at the stage where I want to quantify the merits of the remaining strategies. Good stuff in the thread gents. I will post what I end up implementing.

fan27
 
fan27 said:
So far I am using machine learning to test hundreds or thousands or feature combinations which can result in tens of thousands of different strategies. I do this on just a few tickers. From there I retest the strategies I am interested in based on performance metrics on a greater universe of stocks. This is all automated. I might start with 18,000 strategies and end up with about 20 or 30 that look interesting. This whole process takes about 15 seconds. Now I am at the stage where I want to quantify the merits of the remaining strategies. Good stuff in the thread gents. I will post what I end up implementing.

fan27
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You must be a programming wizard!

How are you able to test so many different strategies and combinations? What programming/coding are you using? I use Excel/VBA and it takes a lot of effort for me to test a strategy each time. My current homework assignment is testing the random entry strategy to see if it indeed beats TA for the equities I am trading.

Regards,
 
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