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TheStudent
Registered: Jul 2003
Posts: 790 |
07-29-04 08:01 PM
Quote from damir00:
it's worse than that. systems using tight stops (as one example) have arcsine-like P/L distributions and using this approach will not just yield less than perfect results, it will yield flat out wrong results. using variable trading amounts invalidates the numbers even further.
Do you mean this?
http://mathworld.wolfram.com/InverseSine.html
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EricP
Registered: Dec 2001
Posts: 883 |
07-29-04 08:02 PM
Quote from Mr Subliminal:
EricP, thanks for a very interesting thread. I can't seem to replicate your values of $2,652 and $1,875 for STDEV and STDEVP. I get $1,760 and $1,607 respectively.
You are 100% correct. Your numbers are correct. I quickly input the six numbers into an existing Excel spreadsheet, and apparently the first four numbers were formated as text, or labels, so when I did the Std Dev calculation, it only based it upon the last two trade values. Thank you for catching that.
Perhaps a moderator could correct my earlier post and replace the $2,652 and $1,875 values with your correct values of $1760 and $1607. If so, they can also delete these last two posts, if they would like, to prevent confusion.
Thanks,
-Eric
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EricP
Registered: Dec 2001
Posts: 883 |
07-29-04 08:12 PM
Quote from damir00:
it's worse than that. systems using tight stops (as one example) have arcsine-like P/L distributions and using this approach will not just yield less than perfect results, it will yield flat out wrong results. using variable trading amounts invalidates the numbers even further.
Very good point. The more non-Gaussian (non-normal or non-'bell-curve') your P&L data is, the less accurate the results of this analysis will be. I find that it can still be useful data, while perhaps being 'flat-out wrong' in a rigorous statistical sense. Don't forget that the goal is to find a useful technique to analyze our P&L data in which to make rational judgments for activation/deactivation. Despite it's limitations, I have found this to be a very useful method for this purpose and have been using it for 18 months in my trading.
I have not tried using this technique for a system such as you are suggesting. For example, a system that makes occassional profits of $400 to $1000, at the expense of having 80% of the trades hit a fixed $75 stop loss. Would this unusual data distribution lead to the results being worthless? I don't know. Thinking off the top of my head, I believe that I would still find the results to be useful and valuable. However, people using any sort of P&L distribution should evaluate how the results look after doing the analysis on various systems and decide for themselves whether it appears to have a use for them. I suspect that it would, regardless of the distribution, although the statistical 'accuracy' would be reduced.
-Eric
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bubbrubb
Registered: Mar 2003
Posts: 67 |
07-29-04 08:18 PM
kestner uses the following when monitoring stategy degradation.
he calculates a linear regression of the equity curve with bands plotted two standard errors above and below the fit. he halts trading of the strategy when the curve breaks below the lower channel, and a decision is made to modify or toss the system.
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opmtrader
Registered: Jan 2002
Posts: 367 |
07-29-04 08:39 PM
Guys aren't we just talking about the Sharpe Ratio here?
A question was raised about variable dollar profit amounts caused by rollover of profits screwing things up. Might this problem be mitigated by analyzing what percentage profit was taken from the underlying (or better yet what portion of profit in ATR terms)?
EricP I very much agree that a robust solution now is better than a perfect solution later so I appreciate your methods. I must also commend damir for keeping us on our toes with the specifics. Keep posting guys. This is a good thread.
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PoundTheRock
Registered: Jan 2003
Posts: 1410 |
07-29-04 09:14 PM
Quote from EricP:
As abogdan pointed out, determining when to activate and deactivate a trading system really becomes a system within itself.
My choice has been to develop a very simple method that will shutdown a trading system when I 'lose confidence' in it (statistically), and activate a trading system when it proves itself to be worthy (statistically). I exclusively use the equation and table shown in the above posts for making these decisions.
...
-Eric
Another idea is to apply technical analysis to your equity curve. The equity curve in and of itself has pullbacks (drawdowns), it has a moving average, etc. You can devise a position sizing algorithm that adjusts trade size based on your confidence level, i.e., your confidence level and therefore position size may increase as the drawdown percentage approaches historical levels, assuming the system isn't deteriorating. It gets a bit tricky, kind of like a decoherent qubit.
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