This question really doesn't belong in this thread, but because you ask, I will write down 3 guidelines and also my personal approach for proper edge development/avoiding getting fooled by randomness: 1) First and foremost, there must be a plausible proposition to explain why the edge exist. If you can't explain it in words, numbers don't mean anything. Keep researching but don't go live without the understanding. 2) Back-test on at least 100 trades before you you start having 'any' trust in the edge. 3) Test at least 3 yrs of historical data. because many a times, an edge works in 2011 wonderfully, but performs mediocre in 2010 and has 40% DD in 2009. Longer history allows you to see different market conditions. Otherwise, you won't know when actual trading while in a DD, whether to press on with the edge or to stop trading it. Its a real problem, believe me. 4) The way I approach it is really unorthodox, compared to conventional wisdom. I start researching edges by looking at data for last 1 year. I want to explore what is currently working in the market. Then I optimize it. It results into a fantastic system. Now, I use this system and apply it on last 8-10 years of data. Obviously performance is zig-zag, maybe profitable but with large DD. At this stage, I try to 'explain/co-relate' the historical edge performance with the kind of market we were in at that time - high vol/low vol, panic, gradual up-run of equity indices etc. etc. This process helps me in understanding the subtelities of the edge. Now, I build a system that will work for the whole time period from 2001 to 2011. And because of my increased understanding of the edge, it allows me to modify my edge slightly in real-time going forward to match the current environment. Long post, but if you read it and absorb it, I have given you a very robust method to guard against being fooled by randomness while testing your edges/ideas.
So the risk off ETF "OFF" is up 2.20% today. ES is down 2.29%. This ETF seems to be tracking the ES almost 100%. What was the point to putting 30 different products in one basket that have to be constantly re-balanced when at the end of the day you could just sell SPY?
<iframe width="560" height="315" src="http://www.youtube.com/embed/G-JkoBzP2kE" frameborder="0" allowfullscreen></iframe> A little promotional material here from Joe Terranova. I know the King is going to order a copy.
When I do my testing I usually run the last 3 years and then the last 20 years. My approach is I start with a hypothesis that makes logical sense to me. For example it is established that Monday is statistically signifigant each week as being more likely to contain the high or low of the week than the rest of the days. To me this logically means that a Monday is more likely to be a trend day. And from that I speculate that gap should be less likely to fill. I then go on to test that idea. I don't believe in randomly scanning for patterns but that is just me. GMST if I reached a different conclusion than you it is probably because we have different trading styles and we structured our testing to be most relevant to our individual style. On a related note I have noticed since I started following ACD that failed A up and down trades become more succesful near the end of the week and the end of the month. I haven't tested it, just an observation. I think Maverick has seen the same thing as he advises against taking A signals late in the month. By the way you guys need to write weekly cliffs or something. I get busy at work for a week and come back and there are like 10 pages to get caught up on. JK of course
Very nice approach. Btw, we have not reached different conclusions. I never did any gap testing, I just did Monday effect testing on equity indices. Btw, which instruments have you tested for your monday gap hypothesis ?
GLD doesn't know in which direction to move next, I think it's still header lower but i'm thinking scaling out here taking some profits and scaling in again when it makes its mind. Opinions?
Closed the position in GLD but will keep stalking, I think the a gap fill is likely, 163.80 is my weekly A Up.
Took some CMG long on a confirmed monthly A up. This market is acting like it wants to explode to the upside. Traders are selling vol hand over fist. Never thought I would see the VIX down 2% on a day with the spoos down 23 handles. Unreal.
Hey guys, if you see any strong tickers, please point them out. I'm buying every strong risk asset I can find.