Do filters really give you better performance in the backtest? I don't filter trades at all since almost all algos I'm using perform better without any filter. Filters also increase the likeliness of curve overfitting.
I'm constantly analyzing my trading history for potential filters. Once I identify something, I have to be able to deduce a rationale for it or I will treat it as potentially spurious. That said, sometimes it's not really possible to understand the market completely. The time of day filter is a good example. I have no idea why it works, really, but time and again, the trades that trigger during those times fail. After a while, you come to the conclusion that you'd just be throwing money away to take them.
I agree that it introduces risk in terms of curve-fitting, but if you actually do identify a valid filter, it can also make a big difference in performance, so it's not as if the risk isn't potentially mitigated by reward.
In my case, it appears that the trades I filter tend to be breakeven to small losses. For example, on the ES, outside of the trades filtered by time of day, I've filtered 76 trades this year and saved myself a total of 21.75 points in losses. On the Euro, I've filtered 93 and saved myself a total of 70 pips. With Crude, it's 58 filtered trades for a savings of 1094 ticks (included in that was a monster 1107 tick loss, meaning that the remaining 57 trades are, again, breakeven, basically).
Almost as important as the savings from losses is the fact that I don't spend the energy executing those trades from start to finish. I just note that they have triggered, wait for them to complete and then wait for the next signal.
From a practical perspective, it's helpful to get rid of those little losses. From a theoretical perspective, I like to think that the fact that I'm not filtering out huge losses means that my filters are not actually curve-fits in the bad sense of the word, but that they are actually helping me distinguish between robust and marginal signals. There are no easy answers, as usual.
Quote from logic_man: All in, my algo has made 866 pips on the Euro over the past 6 weeks, but I've only actually captured 131 of them. Over the bigger picture, though...
Interesting. My working assumption is that any positive stats pulled out of the market are non-stationary. For your case, this belief would cause me to try adapt or optimize the system parameters (including filters) over some moving time window. And 6 weeks wouldn't seem an unreasonable window to me, depending on the target size and speed. Of course, this makes things more complex and if the adaptation window is wrong, then I would lose more.
I suspect that you have done enough back-testing to see that non-stationarity for your system can be neglected over a large enough time period and it still be a winner, which is a great thing. True?
Either that or you are adapting over a large enough time window that 6 weeks is only a small blip, in which case I agree you are certainly right to ignore it.
How many traders would modify a perfectly good algo to try to capture an apparent 6x more pips, no doubt killing the whole thing due to greed exceeding caution?
Interesting. My working assumption is that any positive stats pulled out of the market are non-stationary. For your case, this belief would cause me to try adapt or optimize the system parameters (including filters) over some moving time window. And 6 weeks wouldn't seem an unreasonable window to me, depending on the target size and speed. Of course, this makes things more complex and if the adaptation window is wrong, then I would lose more.
I suspect that you have done enough back-testing to see that non-stationarity for your system can be neglected over a large enough time period and it still be a winner, which is a great thing. True?
Either that or you are adapting over a large enough time window that 6 weeks is only a small blip, in which case I agree you are certainly right to ignore it.
How many traders would modify a perfectly good algo to try to capture an apparent 6x more pips, no doubt killing the whole thing due to greed exceeding caution?
I think I might. Traps abound in this game.
Traps do abound, indeed.
I say this with all due humility, but I think I may have found a way to make things stationary under specific circumstances. I don't know, that's a big claim and I'm not sure how I would even go about proving it and I don't even really want to approach anyone to ask them to help me prove it, because that would require divulging the details. I'm coming up on three years of development down this path and performance continues to basically hold up and my extension of the method from the original market (the ES) to other markets (Euro, Crude and Nat Gas) has been pretty successful so far. In fact, I now find that I'm making the bulk of my profits from Crude, which is a market I had never traded before this past April.
I've been down the road of "greed exceeding caution" before. It's a trail of tears, for sure.
I say this with all due humility, but I think I may have found a way to make things stationary under specific circumstances. I don't know, that's a big claim and I'm not sure how I would even go about proving it and I don't even really want to approach anyone to ask them to help me prove it, because that would require divulging the details. I'm coming up on three years of development down this path and performance continues to basically hold up and my extension of the method from the original market (the ES) to other markets (Euro, Crude and Nat Gas) has been pretty successful so far. In fact, I now find that I'm making the bulk of my profits from Crude, which is a market I had never traded before this past April.
I've been down the road of "greed exceeding caution" before. It's a trail of tears, for sure.
That is truly excellent, congratulations on your ongoing success. And you seem to be be pursuing it with proper caution as well.
I believe that one of the hallmarks of a robust system is that it can trade in markets other than the one it was developed in. The other even more important criteria, is what I mentioned before: positive expectancy in FWs. Those two, together with real-time adaptation and ability to be automated, make my definition for the Grail.
The requirement of positive expectancy in FWs is rather like my view of science. Observation leads to hypothesis; data is gathered to support hypothesis (this is the backtest and includes some unavoidable, in fact desirable, amount of curve-fit); but then, the predictions made must be measured against the future. If it is not or cannot be done, then it isn't real science or a real statistical probability for trading. This is the only way I know to make sure I haven't conducted a noise-fit (constructed a "just so" story of past events that has no real tie to reality and no real predictive power). The power, the reality, is found in the future, in data not yet looked at, in the place where (when I make the prediction) the cat is still both alive and dead.
Of course, this can also be done by just jumping straight from backtest to live trading, perhaps even better than wasting time with FWs as long as the initial trade amounts are small until it is proven. It has the benefit of avoiding being fooled by FW programming errors.
The requirement of positive expectancy in FWs is rather like my view of science. Observation leads to hypothesis; data is gathered to support hypothesis (this is the backtest and includes some unavoidable, in fact desirable, amount of curve-fit); but then, the predictions made must be measured against the future. If it is not or cannot be done, then it isn't real science or a real statistical probability for trading. This is the only way I know to make sure I haven't conducted a noise-fit (constructed a "just so" story of past events that has no real tie to reality and no real predictive power). The power, the reality, is found in the future, in data not yet looked at, in the place where (when I make the prediction) the cat is still both alive and dead.
Of course, this can also be done by just jumping straight from backtest to live trading, perhaps even better than wasting time with FWs as long as the initial trade amounts are small until it is proven. It has the benefit of avoiding being fooled by FW programming errors.
I agree with this. I think there is an inevitable period of high uncertainty in the transition from backtesting/paper-trading to live trading. Parameters whose optimal value seemed set or unknown take on more solidity as the "unseen" data gets run through the algorithm. It is definitely best to take it slowly during this phase. It gets a little bit easier to know what to look for in each new market, but there are still going to be growing pains, so erring on the side of caution makes the most sense.
I simply love the feedback I've gotten, when I try to filter low volume days such as these past weeks. Not much of trades were done and helped me save quite a bit..
Traps abound in this game.
