The Flaw in Trading System Reasoning...?

Maverick1 · Dec 14, 2004

Quote from mogul:

setup and entry edges may come and go, but money management principles remain the same

altough money management won't make a negative expectancy profitable, it can exponentially increase the profitability of even the smallest edge

Agreed on the second part.

It's quite revealing that most traders' concept of money management can be reduced to this: "use a stop"
lol

Remiraz · Dec 15, 2004

Quote from science_trader:

They are compensated by 5000 new systems that wouldn't have showed up before. And so on...
There were a lot of systems that, tested on the 95-00 period, wouldn't have been good compared to a buy&hold strategy. But if you consider the 00-04 period, they could show a far better performance.

Quote from GSCO:

certain systems work during certain times.
Its up to the trader to find out what is current.

So both of you do not encourage doing backtesting over the entire history of a market and instead restrict testing to recent data?

Quote from Maverick1:

Not all edges are born equal

lol

science_trader · Dec 15, 2004

Quote from Remiraz:

So both of you do not encourage doing backtesting over the entire history of a market and instead restrict testing to recent data?

lol

Not especially. My concept for backtesting is the following :

1) A system that works only on a single stock/future/FX has a very large probability to be just random and nothing else. If I have two stocks/futures/FX that seem to work with this system, everytime I optimize my parameters or try to change something to the system, I only accept theses changes if the adjusted performance is enhanced in both stocks/futures/FX.

2) A system that is not consistent troughout time is a bad system. In every case, I try to optimize the time consistency of my system, not its performance over a large time interval. Having a system that brings 5% a month with a monthly volatility of 1% is a better thing than a system that brings 8 months of negative returns and then one month with a 200% return ! In this last case, probabilities are very high your system is nothing more than random.

Socrates · Dec 15, 2004

The true flaw in backtesting is thinking that there are a myriad of systems. In fact there are only two: reversal and continuation.

Remiraz · Dec 15, 2004

Quote from science_trader:

2) A system that is not consistent troughout time is a bad system. In every case, I try to optimize the time consistency of my system, not its performance over a large time interval. Having a system that brings 5% a month with a monthly volatility of 1% is a better thing than a system that brings 8 months of negative returns and then one month with a 200% return ! In this last case, probabilities are very high your system is nothing more than random.

But do you backtest over the entire history of the market you're going to trade?

For example, if you're building a system for the ES, would you backtest the system over data starting from the date ES started trading?

science_trader · Dec 15, 2004

Quote from Remiraz:

But do you backtest over the entire history of the market you're going to trade?

For example, if you're building a system for the ES, would you backtest the system over data starting from the date ES started trading?

It depends on the strategy. You can expect that your system's life expectancy is roughly equal to your backtesting sample. But this is a very empirical rule of thumb.

I personaly never go further than 95 in the past, except in some very precise cases I can't describe here.

dbphoenix · Dec 15, 2004

Quote from Socrates:

The true flaw in backtesting is thinking that there are a myriad of systems. In fact there are only two: reversal and continuation.

You're wasting your time, Socrates. This is ET . . .

maxpi · Dec 15, 2004

Quote from jonnysharp:

un-correlated systems targeting various market behaviours with a central indictor for asset allocation.

... and all traded in the same account so nobody could EVER figure out your strategies!!

Runningbear · Dec 15, 2004

You're also assuming at that the parameters of your sytem are static. If you system is self optimising, it should never have to stop working.

Runningbear

Remiraz · Dec 15, 2004

Quote from Runningbear:

You're also assuming at that the parameters of your sytem are static. If you system is self optimising, it should never have to stop working.

Runningbear

If u modify the parameters (optimise), you're essentially making a new system.

If the market keep changing and the parameters keep getting optimised to fit the current market, sooner or later u're gonna run out of parameters that work both in the past and now.

The thing i'm getting at is "backtesting over entire history of a market".
But I made the mistake of assuming people backtest as far back as they can go.

If traders backtest over recent data and ignore historical data further back then yes, i would reckon that there are unlimited amount of systems.