I can see one problem with modelling equity curve via Bootstrapmethod described in the thread; the draws will be independent (not correlated). This will give less severe drawdowns in a simulation if the real situation is that consequtive wins/losses are autocorrelated
Actully this gives idea for another interesting question: If one is able to model stockprices by means of a simple model, could this (monte carlo) simulated dataseries be valuable as additional data and be used as more OOS data or will it not give any new information in the testing process? (Asuming one is doing a WF test. If Yes, then this would be valuable for end-of-day trading system development as the amount of data here is usually limited). Has this been discussed on this forum before? best regards --- In [email protected], "sohamdas" <soham...@...> wrote: > > It was such a "solid" read,that I took a lot of time to "process" it...almost a day(kiddin, didnt know, it would attract so many high quality replies this soon) > > Many thanks, folks. Especially Dr. Bandy, Matthias,Lionel, Raymond and others.. > > I am a programmer myself, and have a fair bit of mathematical background myself. In the past, I have developed a few trading systems(3 to be precise) and traded them myself. > > In essence, I found when delving with works of Vince, I found he uses the Kelly's Ratio extensively (till the pages I could crack, beyond which I lost my patience.) > > My experiments with Kelly's Ratio has yielded extremely mindshattering drawdowns, but yes, it does compound fairly quickly. So, my internet searches, with Fixed Fractional Ratio led to something called SubOptimal Ratio, in other words the Half-Kelly Ratio. > > But in some ways, I was not deeply convinced or "sold" on this. You see, in many ways, I am a believer in the axiom "less-crowded-it-is-the-better-it-is". And this is not only in the way, of trading ideas, but also in methodologies. > > So my view is, out of an ensemble of 100 traders, 92 search for the "Hail Mary" Indicator/Entry/Setup and 6 of the rest search for the best possible exit. > > And I would say, you can have a worthless random entry, but a good exit, its possible you might have a better expectancy than with worthless exits. > > My belief, the pursuit of bettering entries and exits is surely a worthy one, but having a great rock solid position sizing and risk management built, can literally give the real edge to a trading system. > > My idea, of a really creative position sizing system is, the way Turtles built up their positions. > > A few of my own observations: > > 1. When you read it, on paper, it seems a pretty tame pyramiding, but doing it in reality, will quickly tell you how aggressive it is. > > 2. The position sizing is very apt for trend following. It creates a huge position and in such a pace as to take the maximum out of a trend(in my language: trend following is a slow system, not a bad system, "slow" system). > > 3. You can't use the same position sizing of building in 1/2 ATRs in fast trading systems(most notably, mean reversion systems).[Again, note fast trading system is not necessarily a good system. It just is... "fast".] The market moves too quickly, in case of a bo failure. You need to have profit stops at place as well. > > So coming back to the scenario, I was thinking, the main gold might lie in having really unique position sizing methodology, which includes position sizing,pyramiding(scaling in), scaling out(in my limited opinion, gives a better and smoother equity curve when dealing with fast systems), and risk management. > ---------------------- > Which drives me to a very (I cant stress it enough) important pertinent and thought provoking point by Dr Bandy: > > "Treat it like a business. Know when to quit." > > Doctor,I have got a piece of paper, which follows a series of steps I should take, if and when, god forbid a black swan strikes me. I shudder, but yes its there. I call it, my BROKEN ARROW. > Additionally, I know, when to give up on a system and return client money. [=1.5x of my maximum drawdown] > > --------------------- > For position sizing, I think Van Tharp has got some good ideas. > For pyramiding, I think I need to check this thing out with Monte Carlo. Need to program it,to test different systems(knowledgeable people might like to comment if I am interpreting it wrongly, or reinventing the wheel) > > Risk Management: MAE scatter plots+ MC Analysis > > I hope, you can add something more > > --------------- > It was a very long post, and thanks for read it. > > Soham >
