How to start building a system around expectancy

Discussion in 'Risk Management' started by Pentaquark, Oct 30, 2007.

  1. MGJ


    Um, I think you have misunderstood. The X-axis isn't "trades", it is "calendar dates". The red and the blue aren't two totally different systems, they are the same system run with two different parameter settings. But you're right, the relationship between that particular parameter and the markets did indeed change about half way through calendar year 2002. The markets became insensitive to the setting of that parameter, so the "red" setting and the "blue" setting yielded the same trades hence the same equity curve performance.

    You can imagine that parameter controlled a volatility filter (this isn't true, it's just an easy-to-understand analogy) that discarded low-volatility trades. Red had one volatility threshold (a definition of "what is low volatility") and Blue had a different threshold. But as time progressed, the markets evolved and overall volatility increased. Around mid-2002 the volatility was so big that ALL trades exceeded BOTH volatility thresholds (Red and Blue variants). So the Red and Blue variants took the same trades, so they exhibited the same performance post-2002.
    #11     Nov 8, 2007