Greetings -- MK wrote: "I believe that is called Bootstrapping. In Monte Carlo you have to first guess the distribution of trades - more assumptions. "
--------------------- Be careful when using bootstrapping to sample financial time series data. Successfully trading a system changes the subsequent data. This can cause estimates made by testing / examining earlier data to overestimate profitability. Thanks, Howard On Mon, Jul 26, 2010 at 11:26 PM, mkecera <[email protected]> wrote: > > > Hello, > > I believe that is called Bootstrapping. In Monte Carlo you have to first > guess the distribution of trades - more assumptions. > > Best regards, > > MK > > > --- In [email protected] <amibroker%40yahoogroups.com>, "Mike" > <sfclimb...@...> wrote: > > > > Books that you might be interested in: > > > > Ralph Vince > > - The Handbook of Portfolio Mathematics: Formulas for Optimal Allocation > & Leverage (Wiley Trading 2007) > > > > - The Leverage Space Trading Model: Reconciling Portfolio Management > Strategies and Economic Theory (Wiley Trading 2009) > > > > Your comments on Monte Carlo are incomplete. Monte Carlo is not just > changing the the order of trades. Monte Carlo can also be used to treat > existing trades as a pool of trades from which a greater number of trades > may be sampled in order to project a longer term equity curve. > > > > For example, if you have a collection of trades that you feel adequately > represent the range of trades that your system will generate, you can > randomly draw some number of trades (with replacement) from the pool to > generate thousands of equity curves (e.g. draw 100 trades from a pool of > 30). You may then analyze the resulting equity curves to get such > information as average performance, best performance, worst performance, > etc. > > > > Mike > > > > --- In [email protected] <amibroker%40yahoogroups.com>, > "Matthias K." <meridian202@> wrote: > > > > > > Hi, > > > > > > > > > > > > Indeed this is a very interesting topic. Many thanks go to Howard > Bandy, it is literally a must read when working with Amibroker. > I�m curiously waiting for the new one. > > > > > > > > > > > > > Regarding System Design and Position Sizing: > > > > > > Well, I believe that there are a lot of books out there, but different > authors really do mix up terminology, so this is how I interpret it: > > > > > > > > > > > > Position sizing > > > > > > Tells you how much, e.g. how many contracts or shares one should buy, > Howard just mentioned 2 algos, fixed fraction and fixed ration. Ralph > Vince�s book is a must read on this, however, > it�s not quite easy going. Furthermore, > there�s martingale and antimartingale, whereas martingale > pretty much means: the more you lose, the more you bet. I believe > it�s a sure-fire way to the poorhouse, > that�s why I use ALWAYS anti-martingale. No black swans > welcome in my trading. > > > > > > > > > > > > Risk management > > > > > > Obivously, there�s a clear overlap with position > sizing, but still I believe it�s meant to be a little > different. Say you have a system with a plugged in position sizing algo. You > backtest it and you�ll have an estimate of the drawdown. > Obviously, you will want to adjust position size so that you can stomach the > drawdown. But as a safety measure, you might plug in another strategy. It > might be an equity MA-Crossover, it might be something psychological (a > divorce, an illness), it might also be a safety stop due to increased market > volatility / markets crash. > > > > > > Remember to always measure drawdown in percentage terms, e.g. > Tradestation Strategy Report is pretty useless, because it only shows > drawdown as an absolute figure so it requires Excel to actually calculate > drawdown in percentage terms. Also CAR is calculated correctly in AB, > I�ve seen other software, costing 2k�, still > calculating CAR wrong (10 times 10% per annum is NOT 100%) > > > > > > > > > > > > Portfolio Management > > > > > > Hahaa, I believe this is where a few gold bucks a buried. Portfolio in > terms of which markets to trade has been discussed in the literature, still > this is a very specialized topic already. There not many books found on > this, that�s why I spend so much time thinking about it: > Nothing to be found means a lot to be made and understanding it in great > detail might give me/you a larger edge. Especially a scientific approach > that is not based on gut-feel, is missing. This is what I am currently > working on: Portfolio Management in terms of Trading Systems. So to say, > have a trading systems farm, probably 3-5 systems on one underlying to have > a very smooth equity curve. This includes diversification across a) > methodology (Mean Reversion, Trendfollowing, Breakouts,etc.) and b) > timeframe (day-trading, swing trading, position trading). Well, I have found > 2-3 books on this topic, all of them sort of scratching the surface, > mentioning the topic, but that�s it. So how can systems be > combined wisely and when should systems be switched off, reoptimized, etc. > If anybody knows some books on this, I�d be very happy to > read up on it so if someone knows an author, please post! So far, having > many systems with different logics is the direction I�m > going right now. > > > > > > Something that�s worth having a look inside is this > one: > > > > > > > > > > > > > > http://www.amazon.de/Trading-Systems-Development-Portfolio-Optimisation/dp/1905641796 > > > > > > again, it�s scratching the topic only. > > > > > > > > > > > > The way I develop systems is always the same (If anyone > doesn�t agree with this approach, I�d like > to know why) > > > > > > > > > > > > > 1 contract, share, etc. > > > > > > Commissions excluded > > > > > > 3-5 (5max!) input parameters, such as indicators, ma�s: > it�ll result in a raw system with in-built exits and entries > but no stops. > > > > > > > Optimize the inputs for STABILITY, a profitable set of parameters with > a stable surrounding region > > > > > > Plug-In Commissions > > > > > > Add filters > > > > > > Add stops/targets according to Sweeney�s MAE MFE > > > > > > Plug-in the position sizing algo, �the > compounder� > > > > > > > Test out of sample > > > > > > > > > > > > Works fine for me. > > > > > > > > > > > > After this, I pretty much try to combine systems. Currently this is a > bit troublesome in Ami, but I shall let you know when I have done enough > research, unfortunately I believe it�s gonna take me some > months. > > > > > > > > > > > > What I believe to be very controversial is the topic > �adding noise� to data. I > don�t think it reflects human emotion anymore. Same as > dealing with a random sequence: a coin toss, e.g., can be displayed as a > graph too, but it�s still a normal distribution. So: When > doing quant-trading and believing in it, you make one big assumption: > Markets behave logically, sometimes. I found out that markets contain a > large amount of noise, random behavior. But there are occasions when people > get hit on the wrong spot and start buying or selling aggressively . > That�s the time when my systems jump in and make the kill - > then I�m out. This behavior cannot be found in a random, > probably noisy set of data. > > > > > > Monte Carlo pretty much changes the trade sequence only, right now I > cannot really see why some people think it�s so useful. It > might give you a better estimate of a historic drawdown, but I achieve the > same by multiplying my non-monte-carlo-drawdown with say 1.5� > > > > > > > > > > > > > > > > > > > Greetings from Germany, > > > > > > > > > > > > Matthias > > > > > > > > > > > > > > > > > > From: [email protected] <amibroker%40yahoogroups.com> [mailto: > [email protected] <amibroker%40yahoogroups.com>] On Behalf Of > Howard B > > > Sent: Montag, 26. Juli 2010 16:33 > > > To: [email protected] <amibroker%40yahoogroups.com> > > > Subject: Re: [amibroker] Trading Systems, Position Sizing and Monte > Carlo Analysis > > > > > > > > > > > > > > > > > > Hi Sohamdas -- > > > > > > In my opinion, this is definitely a topic that deserves discussion in > the AmiBroker forum. > > > > > > What position sizing should be used during backtests? > > > > > > If you will be evaluating each trade for its characteristics -- entry > efficiency, exit efficiency, and so forth, then each trade should be the > same size. For stocks and ETFs that means the same dollar amount. For > futures that means the same number of contracts. > > > > > > If you will be comparing equity growth over a period of time to other > alternatives, then you will want position sizing and / or compounding to > some degree. For example, if you want to compare the results of a trading > system to buy and hold, you will want to take the same size position at the > beginning if the test period for each alternative, then compare equity > smoothness, growth, drawdown, etc. > > > > > > If you are planning to use aggressive position sizing, there are > several things to consider. > > > 1. I cannot state it too often -- your system must have a positive > expectancy measured on strictly out-of-sample results. You absolutely cannot > use in-sample results to estimate the likely future performance of a trading > system in any event. And if aggressive position sizing is based on in-sample > results, you will go bankrupt. > > > 2. Traders should have a business plan in place. They should know when > to quit -- either when they have enough that they no longer need to trade, > or when they have lost so much that they can no longer trade or realize that > they should pick another profession. > > > 3. Aggressive position sizing depends on having: > > > A. Positive expectancy. > > > B. Understanding of risk. Both the risk that is acceptable for each > trade from the account, and the risk associated with the trading system. > Most trading systems have higher risk per trade than the account risk > allows, so even taking a position that is everything you can afford to buy > is aggressive. > > > C. The ability to use leverage. Brokers allow use of margin, and some > ETFs have leverage. By using these, it is possible to get 12 to 20 times > leverage trading stocks and ETFs in an ordinary brokerage account. > > > D. Frequent trading, because that provides frequent compounding. For > most trading systems, the final equity of an account is a multiple of the > initial equity that can be computed from: > > > terminal_equity = (1 + expectancy) ^ number_of_trades > > > where expectancy is the average percentage gain per trade. > > > > > > There are two general schemes for aggressive position sizing. As you > dig into the math, you will see that they are closely related. > > > The first is fixed fraction, popularized by Ralph Vince. > > > The second is fixed ratio, popularized by Ryan Jones. > > > Both men have written books and papers describing their methods, and > you can do an Internet search on each phrase and get a lot of information. > > > > > > The essence of both methods is to increase position size when the > system is operating profitably. In gambling terminology, you are "betting > the run of the table". When winning, increase; when losing, pull back. Both > of these are betting schemes called anti-martingale. > > > > > > Ralph Vince has also popularized the notion of "optimal f" -- that > fixed fraction that should be bet on each play to maximize the terminal > equity. The fraction of the account used for each play is determined by the > largest anticipated drawdown or trade loss. He, and everyone else who is > working with real money, shows that the fraction bet on each play Must be > less than optimal f if the account is to remain solvent. In fact, the > fraction must be much less than optimal f if the account is avoid large > drawdowns. Trading at optimal f essentially guarantees drawdowns in the 80 > percent range. > > > > > > Ryan Jones essentially creates two sub-accounts. One is the original > stake, say $100,000. The other is the profits from trading. Ryan waits until > there are some profits, then uses a high percentage of the profits for each > trade. > > > > > > The two methods converge mathematically. Some traders prefer to begin > using one method, then switch to the other as profits accumulate. > > > > > > Before you consider using an aggressive position sizing scheme, and > buying all the stock you can afford is aggressive, please read my other > comments in both this forum and Aussie Stock Forums related to trading > system development and position sizing. And read both Vince's and Ryan's > books, and other material you can find on the Internet. > > > > > > The input to the simulators that model either fixed fraction or fixed > ratio need is a list of closed trade results. These are individual trades, > each the same size. > > > > > > Monte Carlo Analysis is used to rearrange the sequence of trades many > times. The position sizing rules are applied to each sequence and the equity > curve computed and drawn. Typically many sequences are used -- 1000 or more > -- each of many trades -- 100 or more. After all 1000 runs, all of the > equity curves are draw on a single chart and statistics computed that will > allow you to estimate the final equity and probability of both going broke > and retiring wealthy. The plot looks like a straw broom with the straws > angled upward to the right. > > > > > > There are two good programs for testing position sizing. > > > Equity Monaco. A free position size calculator / simulator published by > TickQuest. It accepts a file, in ASCII format, of closed trade results, and > performs Monte Carlo analysis of reordering the closed trades. Highly > recommended. > > > http://www.tickquest.com/?page_id=70 > > > Market Systems Analyzer. Costs about US$350, but sometimes available > for a little less. Published by Adaptrade. Does everything Equity Monaco > does, plus tests aggressive position sizing methods. I highly recommend this > program -- provided you understand trading system development, trading > system validation, account risk, trade risk, and aggressive position sizing, > and you are not a novice trader. Again -- using aggressive position sizing > with a trading system that has not passed tests of statistical validation > will result in a swift trip to bankruptcy. > > > http://www.adaptrade.com/ > > > > > > To use either of these programs, run your backtest using the parameters > and settings that will be used during trading and that represent the > out-of-sample runs from walk forward testing. Export the trade list to a csv > file. Strip everything unnecessary out of the file and save it in the format > the position sizing program needs. Then run the position sizing simulator. > > > > > > ---------------- > > > > > > There are two other areas where Monte Carlo Analysis is useful. > > > > > > One is adding noise to the input data. This can easily be done in > AmiBroker now and is explained in my book Quantitative Trading Systems. > > > > > > The second is testing the sensitivity of parameter values. This can be > also be done now, but requires some careful thought and planning to > determine which parameters should be tested and over what range. > > > > > > ------------- > > > > > > Thanks for listening, > > > Howard > > > > > > > > > > > > > > > > > > On Sun, Jul 25, 2010 at 11:33 PM, sohamdas <sohamdas@> wrote: > > > > > > > > > > > > Hi Folks, > > > > > > Though, not exactly, Amibroker related but I guessed it might be a > great place to ask. > > > > > > Can anybody of you, who have ample experience designing trading > systems, can comment that when I am designing a trading system, say, entries > and exits are to the extent possible frozen, what is the position sizing I > should use to run my preliminary backtests. > > > > > > And what are the inputs I should pass onto the Monte Carlo routine. > > > > > > Is it possible to conduct MC Analysis in Amibroker? > > > > > > Soham > > > > > > P.S: Thoughts of Dr. Bandy will be much more than welcome > > > > > > > >
