V.10:1 (43-45): Testing Trading Rules Over Different Time Periods by John Sweeney
Product Description
Testing Trading Rules Over Different Time
Periods
by John Sweeney
After two Sundays of dinking around (Settlement, STOCKS & COMMODITIES November and December 1991), I'd finally converted a chance idea to something with remotely promising prospects something on the order of a three-to-one return on margin. I'd done that by emulating the basic ideas in four trading rules (Figure 1) plus two stops. As has been my experience, the stops were the most effective in improving the results and the stops were selected by the maximum adverse excursion (MAE) analysis (Figure 2) to cut off the big losers while allowing enough room for winners to be successful.
Many people look at Figure 2 and say, "Hey! We've got more losers than winners ! " Right. That's normal. You want to look at the dollar income from that, as in Figure 3, because we know the test was profitable. This figure gives a better sense of whence the profits come. System Writer Plus accurately picked up two gap days when stops were ineffective, so we have an unusually high dollar loss on two trades, despite which our approach is profitable.
PROBLEMS ARISE
Even if profitable, the system raises questions. There are fewer than 30 trades, the magic number needed for reliability. Just one big winner earned a ton of money. What about other time periods? What about other tradeables? Couldn't the system be refined to be even more profitable by eliminating the losers?
To make the last first, refining things at this point is impossible. We're testing on too short a period to reliably sift through and spot problems in the logic. Better at this point to test on several other periods to find these problems, refine the system if possible and then retest on all the different periods. This iterative process, while tedious, usually highlights gaps in my trading concepts.
After two Sundays of dinking around (Settlement, STOCKS & COMMODITIES November and December 1991), I'd finally converted a chance idea to something with remotely promising prospects something on the order of a three-to-one return on margin. I'd done that by emulating the basic ideas in four trading rules (Figure 1) plus two stops. As has been my experience, the stops were the most effective in improving the results and the stops were selected by the maximum adverse excursion (MAE) analysis (Figure 2) to cut off the big losers while allowing enough room for winners to be successful.
Many people look at Figure 2 and say, "Hey! We've got more losers than winners ! " Right. That's normal. You want to look at the dollar income from that, as in Figure 3, because we know the test was profitable. This figure gives a better sense of whence the profits come. System Writer Plus accurately picked up two gap days when stops were ineffective, so we have an unusually high dollar loss on two trades, despite which our approach is profitable.
PROBLEMS ARISE
Even if profitable, the system raises questions. There are fewer than 30 trades, the magic number needed for reliability. Just one big winner earned a ton of money. What about other time periods? What about other tradeables? Couldn't the system be refined to be even more profitable by eliminating the losers?
To make the last first, refining things at this point is impossible. We're testing on too short a period to reliably sift through and spot problems in the logic. Better at this point to test on several other periods to find these problems, refine the system if possible and then retest on all the different periods. This iterative process, while tedious, usually highlights gaps in my trading concepts.
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