If there is a quantitative measure for Edge, what is it?

Discussion in 'Strategy Building' started by OddTrader, Jun 9, 2006.

  1. toe

    toe

    Testing a system vs a randomised system is much better than simply looking for a positive expectancy, in much the same way as medical researchers measure the results of a double blind study using a new drug vs a placebo rather that just looking to see if patients get better on the new drug (they likely will get better without any drug).

    The reason using randomised trades as your benchmark is better is because you can get a random system to make money if the market is good enough. So simply looking for a positive expectancy doesn't proove non random events.

    Even forward testing has its drawbacks because market conditions can change between initial run and out of sample runs.

    If you want to determine whether a system has an edge over random then 'Acrary' has already done very good work on this and posted a lot on it, why re-invent the wheel.
     
    #21     Jun 9, 2006
  2. Thanks Toe for your contribution and independent thinking. :)
     
    #22     Jun 9, 2006
  3. rosy

    rosy

    your edge is the amount over expected value you think you'll make. you can't quantify it. with it, you can use the kelly criterion to optimize you bet size.
     
    #23     Jun 9, 2006
  4. So you are saying actually there is a measurable and quantitative value for an edge.

    Perhaps I wouldn't mind to keep trading a system even if it produces a small negative value when comparing to an expected value which is an extremely huge amount.
     
    #24     Jun 9, 2006
  5. rosy

    rosy

    your_expectation -expected_value=edge

    however, your expectation might be way off.
     
    #25     Jun 9, 2006
  6. There are two issues:

    How to determine YourExpection, quantitatively?

    It seems illogical that: With a fixed value of YourExpectation, a (poor performance) system with a smaller (or negative) ExpectedValue would produce a higher/ better EdgeValue.
     
    #26     Jun 9, 2006
  7. Yes Equalizer is correct... Acrary has measured it, I can't find it though...do a search and do us a favor...post the link here.

    Measuring time, consistency, profitability and risk...is Acrary's playground.

    Recently I suspect he has suspended teaching as this business of trading may be a game of theft....But what do I know? I could be completley wrong.

    Michael B.


     
    #27     Jun 9, 2006
  8. Depends on what you're trying to measure the edge in. For example, if you want to measure the edge of a short term entry technique you're trading on a daily basis, use time exits. Get distributions of trades for your entry method with 1,2,3,4,5,... day exits and compare them to the trade distributions for the same duration time exits but with random entries. Do this visually and with (preferably) nonparametric statistical tests, but the t-test does an OK job.
     
    #28     Jun 10, 2006
  9. Personally I like this idea very much, since I've been using a very similar concept (but quite different method) in order to measure the edge value of a system for my own evaluation.

    I guess the key point would be making a comparison against a benchmark chosen for a pre-defined purpose.

    Many thanks!
     
    #29     Jun 10, 2006
  10. Took a bit long before trying to arrive at something sensible in this thread. Simply restate the above without the fuzzy gobbledygook. Read further:

     
    #30     Jun 10, 2006