Very interesting book but I have some problems with what David Aronson's tells me and what the source tells me. On page 161 of EBTA Aronson says : "According to the C&O study the results uniformly suggest that head-and-shoulder trading are not profitable". When reading the study of Chang&Osler they tell me that "Substantial empirical research documents that exchange-rate forecasts are not formed rationally. This paper identifies a common technical trading signal, the head-and-shoulders pattern, as a potential source of departures from rationality in exchange-rate forecasts. Forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994, using two criteria for rationality: profitability and efficiency. Resulting profits, replicable in real-time, are tested for statistical significance using a bootstrap technique. We find that the rule is profitable, but not efficient, since it is dominated by simpler trading rules."
Regards, Ton Sieverding. ----- Original Message ----- From: whitneybroach To: [email protected] Sent: Friday, March 16, 2007 6:12 AM Subject: [amibroker] Detecting data mining bias with modified Monte Carlo procedure While reading David Aronson's book _Evidence-based Technical Analysis_, I stumbled across a modified Monte Carlo permutation (MCP) procedure that compensates for data mining bias, assuming that the "best" permutation of rules was not selected with a directed search. From Aronson's perspective, this is good news. He views data mining as a useful procedure in the discovery phase of research. Plus, MCP does not require out-of-sample data. Thus it is possible to use more data for mining and still minimize data mining bias in test results. The likely result: fewer false positives for systems that are worthless, and fewer false negatives for systems that are valuable. The paper with discussion and C# code is here: <http://www.evidencebasedta.com/MonteDoc12.15.06.pdf>. Aronson's book site, including a link to Amazon, is: <http://www.evidencebasedta.com>. Separately, I'm looking forward to the imminent books from Howard <http://www.quantitativetradingsystems.com/> and Ralph Vince <http://tinyurl.com/2os2p7>. Not being a user of IO (or other AB add-ons), I have no idea if this MCP approach is already being used in the AB community. It looks interesting to me. MCP appears to require market data and trade data from every run, not simply the trade data. That suggests to me that an AB add-on, rather than a completely external program, would be a more straightforward implementation. Aronson also refers to a patented boostrap procedure that accomplishes much the same thing, White's Reality Check, named for Halbert White, the patent holder. Apparently WRC is not available commercially. Best,
