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Hi Dave,I finally got back to your email ... hope you are still
around :-) I find your post very interesting and have what are, undoubtedly, too
many questions. Sorry that this appears a one way street: there isn't much I can
contribute to this topic.
Herman,<?xml:namespace prefix =
o ns = "urn:schemas-microsoft-com:office:office" />
My responses to your questions
are below. Please don’t think of me
as anyone who necessarily knows what he’s talking about—I’m not convinced that I
do. Just consider these as inputs,
another point of view, one person’s way of looking at things from a possible
choice of many.At 10:04 AM 7/3/01 -0700, you wrote:>...I
start by looking at a certain market, and trying to break that up into pieces
with different>character, e.g. trending, trading range, reversing, etc.
So, if I'm trying to build a reversing>system using an oscillator(s),
I'll want to select those segments of the market that are reversing>or
trading in a range. Assuming I have enough bars, I can break those into segments
for in and>out of sample testing...Do I understand correctly
that, given a long trend, you'll test the same trending period in segments?
Do you use overlapping sample periods?
I’d rather use successive, long trending periods assuming I
have enough data and sufficient trades are generated.<SPAN
style="mso-spacerun: yes"> I’d rather not use overlapping
periods. Again, I’ll start out with
some sort of an idea for an entry like, “I want to buy pullbacks in a
trend…” This was a popular method
during the recent bull run. Does it
still work? Perhaps, depending on
the timeframe you are using.
So, I’d want to start developing
a system on some markets that are very trendy.<SPAN
style="mso-spacerun: yes"> I’d find those in a scan of my database,
using some criteria that I would establish to measure trendiness.<SPAN
style="mso-spacerun: yes"> This should give me some markets
(securities) which tend to be more trendy than others.<SPAN
style="mso-spacerun: yes"> Hopefully, it will give me more trends
& bars to work with.>Once I've found a successful approach
to the specific character of that market, I can expand my>testing to a
larger portion of the historical data, but I'll need to find a way to turn the
system>on and off depending on what type of market behaviour is being
exhibited. Then I'll run this>overall system against the larger data set,
in much the same manner as you describe below.How many types of market
behavior do you recognize, do you consider patterns (i.e. head & shoulders)
a market behavior? You mentioned Trend, trading range, reversal point, ... any
others?
For me, I’m sticking with some
very straighforward approaches like trend following and volatility breakout,
because they are fundamentally appealing to me—I can rationalize why this type
of a trade will continue or fail.
H&S patterns or any other type of behaviour that makes sense to you
is what really matters. I would
recommend a system developer focus on those patterns or market actions that are
the most intuitively appealing.Do you use exporations or other
methods to classify the market?
I use Explorations to find those
markets that I’ll use in building and refining my system.<SPAN
style="mso-spacerun: yes"> I suppose this is a way of classifying
markets and selecting those which match.>...A personal belief
of mine is that market behavoiurs are persistent. The S&P is much more
likely>to continue it's reversing behaviour in the future. I'm fairly
confident that next month, it>won't become a trendy market.I am
intrigued by the idea of classifying stocks by their behavior. I tend to assign
as much value to a system that works as to a system that doesn't work, they both
carry an important message for us to decode. I
agree completely. They both offer
lots of information. The classic
example is the system that loses 90% of the time, and loses by a lot.<SPAN
style="mso-spacerun: yes"> I wonder if I just reversed my
entries….Did you ever make an attempt to develop a classification
system for stocks? I don't mean classifications by 'temporary' characteristics
like trending, I mean more permanent, what appear like price-independent
characteristics. An example would be a security's sensitivity to certain
oscillators.I haven’t.<SPAN
style="mso-spacerun: yes"> I’m using these periods of trending and
flat to build my systems. In the
end when running across a portfolio, I want the system to make that
determination.
Since Price and Volume are the
only two pieces of data we have, all indicators are derived from one, the other,
or a combination. My approach is that the indicator is just an aid to seeing the
price action more easily.
Most indicators are correlated
because they are all based on price in one way or another.<SPAN
style="mso-spacerun: yes"> Adding too many to a system just
engenders curve fitting and unrealistically inflates results.
One technique that can be very
beneficial is to focus on making your portfolio or testing folder less
correlated. If you had all bank
stocks, plus some brokerages, you are probably not getting a lot more
information from your system tests than just using the Banking or Brokerage
indicies.>A sidenote here is that I'm making certain assumptions
about basic system design. I subscribe>heavily to the signal / trigger
approach as well as Chuck LeBeau's methods for developing robust>systems.
(www.traderclub.com) I really like adaptive rather than fixed approaches. Also,
you'll>notice that markets look very different depending on the
timeframe: comparing a 3 minute chart of>the S&P with a daily chart
is a good example.Chuck's bulletins are many ... I don't recall him
referring specifically to robustness. Are you referring to his overall approach
or to specific measures designed to measure and improve robustness?<SPAN
style="COLOR: #333399">I’m referring to his overall approach.<SPAN
style="mso-spacerun: yes"> I’ve read and reread all of his
bulletins numerous times, as well as his book.<SPAN
style="mso-spacerun: yes"> All are excellent.<SPAN
style="mso-spacerun: yes"> The chandelier exit using a multiple of
ATR() is one example of a robust, widely applicable exit technique.<SPAN
style="mso-spacerun: yes"> I also like his method of taking profits
(or partial profits) at an extreme ATR() move in a positive
direction.When you say "adaptive" do you refer to a human or a
formulae quality?<SPAN
style="COLOR: #333399; FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 12pt; mso-fareast-font-family: 'Times New Roman'; mso-ansi-language: EN-US; mso-fareast-language: EN-US; mso-bidi-language: AR-SA">Formulae.<SPAN
style="mso-spacerun: yes"> In my systems, I’m counting on the human
behaviour to remain consistent and predictable (i.e. when the S&P breaks a
pivot to the upside, traders sell the rally, and the market pulls back before it
continues upward.)<SPAN
style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 12pt; mso-fareast-font-family: 'Times New Roman'; mso-ansi-language: EN-US; mso-fareast-language: EN-US; mso-bidi-language: AR-SA">>Just
some somewhat random ideas to go with your thoughts....Thanks so much
for your feedback,Herman.
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