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b,
I appreciate what you are saying, but 25% of 6000 stocks (3000 NYSE and
3000 NAZ) is still 1500 stocks. That's quite a lot of stocks to test your system
on. I really don't think you'll have a paucity of stocks to test with using
volumes of 300 to 500 K or more, do you? Selecting high volume stocks insures
you of good liquidity and mitigates slippage and big bid/ask spreads. So, I
think it is to your advantage to filter out the low volume stocks. Your
resulting universe, even if it is only several hundred, is still plenty large
enough to provide statistical validity to your performance findings.
AV
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
b519b
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Thursday, June 19, 2003 9:36
PM
Subject: [amibroker] Implications of
Minimum Volumes (was Historical volume)
Chuck,I have noticed this increase in volume over
time and have been trying to figure out the implications for testing for a
while now. I have not come to a firm conclusion. Actually I have a lot of
unanswered questions.But it is not just the changes over time that
concerns me. Consider the following statistics that come from an
eyeballing a list of 7,000 stocks sorted by average volume in 2002. The
numbers are rounded to nearest multiple of 5. I hope no one will worry
that the total is 95% - this is just an estimate and I consider the
precision of 5% intervals to be more than sufficient for my present
purpose.15% had average volumes under 5k20% had average volumes of
5-20k15% had average volumes of 20-50k10% had average volumes of
50-100k10% had average volumes of 100-200k10% had average volumes of
200-500k15% had average volumes of 500k and upIf minimum average
volume for testing is set to 500k, that excludes 75% of stocks. Depending
on how many or few candidates a stock selection method generates, one
might be left with too few to make a good statistical conclusion about the
method.Just what is an appropriate minimum volume to set for trading?
Each of us will have a different answer to this question depending on the
size of our trading account, whether we enter with limit or market
orders, how much slippage below one's stop price one considers
tolerable, etc. These are all very important "practical"
considerations that must be taken into account at some point, but they
are "practical" considerations that usually do not relate to the basic
idea of the strategy being tested. Thus, I work with the assumption
that it is best to do 2 sets of tests - one to determine if a trading
concept is valid and a second set to determine if it is tradable.
Thus, for initial testing of a trading concept or idea, I want to
include all the stocks that might behave in a similar fashion. Thus I
often test with a minimum volume of 100k. Using 100k still excludes 50% of
all stocks, but that is 3 times the number one would have with a minimum
volume of 500k. Dropping to 50k only adds another 10% (actually increases
the stocks in the test pool by 20% since one is going from 50% to 60% -
got to watch how those percentages really work). I usually use 100k when
testing stocks during the past 5 years or so. However, now that Chuck has
raised the issue of low volumes for earlier years, and given the near
completion of a new database of 15 years data, I may consider going to
50k as the minimum. Before deciding I should really do a cross section
study of the percentage of stocks in each volume grouping for 5 years
periods - say 1985, 1990, 1995, 2000.Some may wonder why bother
testing with a minimum of 100k if one is going to use 500k when actually
trading - would one not need to redo the tests using 500k minimum just to
be sure the method works with the higher volumes as well it tested with
the lower volumes? Of course, one would need to retest because the larger
number of stocks with 100k-500k could mask under performance by the 500k
group. So why bother doing the initial testing with lower volumes?
Because using lower volumes gives a much larger universe of stocks and
that larger universe allows you to test dimensions (such as price
restrictions for stocks selected) that would not be possible with a
small group. This arises from what might be a personal hang up of
mine, but I will not even both recording on paper any test result that
has less than 7 stocks in a test bin or period. Test results from a group
of 5 stocks is just too prone to randomness to be of much value for
deciding if the basic concept of a method is sound. Actually, I prefer
to have 20 stocks in each result bin when testing a concept. If the
concept tests well, then I can later test to see what the effect is of
reducing the number to actually trade to 10 or even 5. If the profit
increases sufficiently to make up for increased variability of returns,
then one might decide to trade the method just with 5. Not that I would
ever have 20% of my capital in any one stock. If the best way to trade a
method is just to take the top 5 stocks, then I might devote 25% of my
funds to that method. The rest would go either into other methods or into
selections 6-20 or the first method. My preference is to have 20 stocks in
2 or 3 distinct methods than 20 stocks in one. But I am getting off focus
from the question of minimum volumes.I am eager to learn what
approaches others take to the question of minimum average volumes. My
ideas are still forming on this topic. b--- In
amibroker@xxxxxxxxxxxxxxx, "Chuck Rademacher" <chuck_rademacher@x>
wrote:> I was about to send this email to "b", but I would welcome
comments from> anyone else interested in such historical
work.> > At the risk of having some of you ask why it matters,
my backtesting> generally goes back to 1985. Just
yesterday, I posted a message to this> group saying that I always
use one set of parameters across all stocks and> across all
timeframes. One of the downsides of this approach (perhaps)
is> that volume has changed over time. I suppose that one
could argue that> volatility changes over time as well.
Volatility, however, goes through> cycles and volume just keeps
growing.> > The question that I have involves volume
filtering. To me, it is essential> that volume filters
be applied to actual volume and not backadjusted volume.> My
concern, however, is that if I apply a filter requiring an average
of> 300,000 shares, I don't get very many hits back in the late 80's
and early> 90's.> > I have a solution in mind and
would appreciate some input or dialogue on the>
subject. It seems to me that volume filtering should be
based on some> percentage of the total volume of all NYSE stocks
(for instance). I> haven't done my homework yet, but
let's say that the average volume today is> ten times more than it
was in 1985. If I decide to filter today at 300,000>
shares, wouldn't it make sense to filter based on 30,000 shares in
1985. I> can probably answer that question myself by
saying that I don't think 30,000> would be an adequate filter in
1985. But I could scale it from 100,000 to> 300,000
progressively between 1985 and 2003 based on mathematical
equation.> > You may ask why backtesting to 1985 (or any
other date) is important.> There are dozens of reasons, but the
most important reason to me is that> prospective investors in any
funds that I manage want to see how a proposed> system would have
performed over a statistically meaningful period of time.> You can
argue about the relevance of such information, but THEY EXPECT TO>
SEE IT. For the record, I also think that it is very
important.> > I welcome comments from anyone with an interest or
knowledge in this area.Send
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