Registered: Feb 2003
12-14-09 09:56 PM
Quote from TSGannGalt:
Heh... no one seems to comment on AFG's equity curve so I'll add...
1. The fact that the equity is log-normal, it doesn't provide the true picture of the actual model due to the compounding and it's vulnerable to a variation of a "selection bias" caused by equity curve compression. (Take a look at any index on a log chart and it looks like a very smooth upwards curve until the early 2000s...)
2. Because it is... log normal, there is definitely, at the least, a position sizing scheme included. So we're not sure whether the curve is generated by the risk management implemented or the signal. If AFJ Garner wants to prove a point from a pure "trading system" perspective, he needs to re-generate a risk-adjusted curve.
I have to emphasize that... risk management is a key component common to any kind of trading whether it be trend-following, mean reversion... discretionary... automated... etc. etc. etc.... I mean all trading requires risk management. Though, there is a danger that the RM scheme can be fitted to the curve (just like using MAE/MFE).
What I mean is... I can have a set of bad signals (random entry) and still make the equity curve positive by manipulating the "historical" equity curve. ("Historically possible"... in live trading, it doesn't work that way... Why? *drum roll* Markets Change)
Anyways... I have every reason to be skeptical about the equity curve and I wouldn't look at the continuous line and conclude anything at this point.
AFJ Garner, no offense intended. Your post does serve the point, but everyone else is being a bit too optimistic and conclusive so I had to pull them back and provide them with a sense of perspective...
Most people who do analysis on equity curves do understand the relationship of the "signal" and the "financial management". They are parts of the same equation that represents the equity curve.
Usually people use families of log curves as well. Check out some of those for more personal incite.