You're over-analyzing my original questions. It has little to do with the actual process... It's simply a question to be discussed. So the Objective List you made does not reflect my point of view. Though, I think it's a good starting point for a discuession.
I didn't use your post as a starting point, but the first objective I came up with happened to be your question. I quickly assumed that my direction was your direction. I guess I was simply being curtious and structured it the wrong way. sorry
Well... things have been very conclusive (in a sense) in this thread... In terms of, developing single signals and position sizing, I think there's been plenty of discussions about it. But there hasn't been enough discussions about portfolio management from a systematic trading standpoint. I've done some research regarding it and continue to do so, and I'm sure there are others (though very few in ET). So... I'll start again with a question... (again) What risk measure"S" should traders be using to measure they're model? From a single system to a portfolio standpoint? To explain a bit with my newbie language: Sharpe ratio is obviously not the perfect measure to use as a fitness. It's not almighty. A simple example would be when you develop a good trend-following model. Using Sharpe would thrown it out easily. And obviously, you can have a piece of shit intraday system but it can survive the selection criteria. Well.... -------------------------------------------------------- To narrow it down a bit more... Starting with a single system, what type of measures will be useful to measure a single system, from a portfolio standpoint? - Would you, also, throw out a good, yet volatile system, or implement a crappy but low volatility system and why? Obviously, the simple approach would be create a profile of your current portfolio, then run a diff. analysis, but hopefully we can keep that out for my question above. PS. Alan, I know you read this. I'd love to hear from you about this topic.
Hey, why do you ask questions? Could you share your own results? I tried to find "optimal fitness function" for my strategy. Not portfolio, but single system. I have tried Sharpe, yield/max DD, Sortino, Lottery approach (stochastic dominance I and II). But I do not differ the best fitness function. Sharpe is not good for me. May be simple profit factor is quite good as an optimizational parameter. Or I mix together some formula fitness = PF * (yield / max dd) ^ 0.1 so on From mathematical point, the solution is the Stochastic Dominance II. Any aproach leads to overfitting if you do not have enough data. I don't think that volatile system will have a good Sharpe ratio.
There are a lot of "measures of goodness" (also called "fitness functions", "Gain-to-Pain ratios", "performance statistics", etc). Ask yourself "why?" Why are there dozens and dozens of different ways to evaluate the desirability of an equity curve? With all of these to choose from, why do people continue to invent new ones, even today? Sharpe Ratio Sortino Ratio Ulcer Index Kestner K-Ratio MAR Ratio Return Retracement Ratio Semideviation Sharpe Ratio R-Squared Sterling Ratio Profit Factor Seykota Lake Ratio Pessimistic Return On Margin Correlation to Perfect Profit Walk-Forward Efficiency R-Squared Monte Carlo derived, 95% confidence, CAGR WL Score I believe the answer is: because no two traders can agree on what constitutes a "desirable" system. So each trader invents his own measure of desirability .... which all other traders reject.
overall on the topic of this thread. little or even better negative stress correlation is what you want. who cares about correlation when things go up? that is the whole problem about markowitz. he looks at simple correlation, which, in upward sloping trading systems will most of the time be: corr in upward e-curves. which is the one you don't care about. i dare say the real problem does not lie in the computation of correlation but somewhere else: how to develop another strategy which is really different. IMO this takes a lot of discipline. you really have to dig at another corner. maybe even take other markets. or other time frames. it is so difficult not to just trade on the same effect, just by means of other tools. the problem is that system development as such is real hard work and it is very tempting to lean back, once you finally have found something that works. it is difficult to motivate yourself to do it all over again somewhere else. so the real problem takes place in the mind.
our take: we discuss what next development would increase overall sharpe highest per unit time of development. we trade futures at the moment, both on daily and intraday data. we decided to look at stocks, using variations of existing methodology. hopefully uncorr and not too much time of development. the problem is that you need to judge this before you develop. we finally looked at wavelets six months ago. took us quite some time to find out that they by themselves do not make much sense. that is the problem with the complex stuff: you really pay development time for this additional potential sharpe. this illustrates my earlier point: additional sharpe per unit of development time. it could well be that you have a set of strategies and long term trend following, while having a spare of 0.8 on its own is the best thing to develop, since it might be uncorrelated to your stuff that is on trading and it does not take too long to develop. i honestly don't believe too much in overquantifying the issue. with every backtest, which is essentially the basis of your correlationMonteCarloVaRWhatHaveYou analysis you have the danger of overfit. that is the biggest issue in my eyes. and if you put optimisation on top of that ... well, most of the time just waste of that very time. all IMHO. and i am not jim simmons. ...
The more you learn about it the better it becomes. Don't listen those "know-it-all" guys here. I guarantee that if you investigate it thoroughly you will find it more than rewarding. I stopped answering to stupid remarks long time ago. I am on the side lines these days. Just enjoying the science. MAESTRO
i stopped believing in anything i hear and read until i tried it out within my team ... ... but usually my guys come back to me: "all crap" ... but who knows, once in a while ... my take on this, just from top of my head and without looking at it: the systems, even if they do loose over years must have certain features. they can't be random, since out of random you can't moneymanage return. martingale blablabla. this certain feature must be autocorrelation. (sorry you probably covered all that ... i did not bother reading the whole thread ... too weird a day out there ...). now your system of systems just trades that: the autocorr of the underlying equity curves. all of a sudden it makes perfect sense.