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For many, perhaps the majority of cases, 1,500 stocks will be more
than enough to give a good number (say 20 or more) of stocks that
qualify in any timing cycle.
Yet, tt depends how many of those 1,500 qualify when one's market
timing signal says "Go". If the other criteria in the strategy being
tested are rather tight there might only be a 1/2% that qualify
which is just 7 or 8 out of 1,500. But if the testing universe is
approximately 3,000 (with a mimimum avg vol of 100k) then one has a
sample size of 15.
And 15, is just barely enough to get a hint if taking the top 10 or
top 5 improves results significantly. If one just has 7 or 8 to
start with it is impossible to tell if the top 5 matters (dropping 2
or 3 introduces too much randomness to draw any conclusions). For
looking at how effect a sort is, it is better to have 40 that met
the minimum qualifications.
That is what I mean about a larger universe allows one to test more
dimensions than a smaller universe.
b
--- In amibroker@xxxxxxxxxxxxxxx, "Al Venosa" <advenosa@xxxx> wrote:
> 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
>
>
> ----- Original Message -----
> From: b519b
> To: 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 5k
> 20% had average volumes of 5-20k
> 15% had average volumes of 20-50k
> 10% had average volumes of 50-100k
> 10% had average volumes of 100-200k
> 10% had average volumes of 200-500k
> 15% had average volumes of 500k and up
>
> If 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.
>
>
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