Wealthlab 'Top Scripts' Page.

Some of the strategies on that page seem to have done enormously well according to the metrics on the page, what is the catch?

 

The catch? Paper trading

 

I figured that, so their paper trading is invalid?

 

I'm not a user of Wealth-Lab as I am not a Fidelity customer. So I don't know whether you mean "paper trading" or back-testing. What are the results based on?

Jack

 

Maybe the appropriate course of action for our Original Poster ("OP") is to open an account at Fidelity and trade some of these Wealth-Lab Top Scripts with real money. A cost-versus-benefits analysis would be helpful when making the decision.

Benefits are those positive-utility results that accrue if you trade the Top Scripts with real money AND they make the levels of profits that you anticipate. Benefits would include: big profits, personal satisfaction, reduced stress (since the computer + Script would be making the decisions, not the OP).

Costs are the negative-utility results that accrue if you trade the Top Scripts with real money AND they perform more poorly than you expected. Costs include: lost money, lost opportunities (you could have done something else with the money instead of trading Wealth-Lab Scripts (e.g. put it in the bank to earn interest), and that something else might have had greater utility), sadness, increased stress, and perhaps embarrassment.

I would suggest calculating the Expected Value of benefits and the Expected Value of costs. The most simplistic way to do so is to quantify Benefits in dollars, to quantify Costs in dollars, and then multiply each outcome by its (estimated) probability. So for example if you think there's a 40% probability that the Wealth-Lab Top Scripts will generate the same profits in real life using Your Money, as they do on the Wealth-Lab website, then:

Expected Value of Benefits = (0.40 x $Benefits)
Expected Value of Costs = (0.60 x $Costs)

Now just compare the expected values. If the EV of Benefits is bigger than the EV of Costs, according to Your estimates of the benefits, and Your estimates of the costs, and Your estimate of the probability of complete success, then it seems sensible to open an account and start trading. In fact it seems stupid not to.

 

How is that Ed Seykota impersonation working out for you?

 

Craig66:

The reason I asked about back-testing vs paper trading:

1) Backtested results may or may not be over-optimized and do not deal with real-time data. Depending on Wealth-Labs' design there may or may not be distortion of the results caused by WL's handling of stops versus buys and sells. If it is an intraday system, especially tick-based, the system acts on the bar/tick instantly, there is no system latency. In the real world you are behind the trade your system sees on your screen.

2) Paper-traded results may be based on an optimized system, but if the results include trades made against your broker's live simulator, they are much more realistic in that your system, and the broker's buy/sell simulator, are acting on real-time data with a close approximation of the latency you can expect when you go live. Any latency in buying/selling/moving an order is a function of the brokers' simulator as opposed to the broker/exchange transaction time.

Neither backtesting nor paper-trading can show you the impact your trades will have on the market, but if you are a small size trader and you trade highly liquid issues it's probably not too important.

My guess is that the WL scripts are all tested against data stored on the developers PC.

Jack

 

Thanks JackR, those would be my guesses as well, it's obviously over optimized in some way or another, otherwise all Wealthlab users would by rich and this is not the case to the best of my knowledge.

 

Who has a "live simulator" that is available for retail traders?

Last I checked (in 2005) Wealthlab didn't handle portfolio level backtesting... which is very important unless you only trade one instrument ....

 

Not speaking of WealthLab, but AmiBroker and Neuroshell both provide an interface with Interactivebrokers' Paper Trading account via IB's API. IB's paper trading account is virtually identical to its live system. I have not tried AmiBroker against my IB account but have used a Neuroshell\IB interface (with growing pains) for over two years. Both programs have portfolio backtesting capabilities. I'd say AmiBroker is better for that purpose.

Jack