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Re: Re: Re:[RT] A note on Forecasting / Mandelbrot



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Here it is
 
 
Jan Philipp
 
----- Original Message -----
From: Jim White
Sent: Tuesday, December 09, 2008 7:28 AM
Subject: Re: Re: Re:[RT] A note on Forecasting / Mandelbrot

Jim,
I am a big fan of Armstrong. Can you provide a reference to the essay you noted?
Jim
----- Original Message -----
From: Jim Ross
Sent: Tuesday, December 09, 2008 7:23 AM
Subject: RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

I?m not a statistician, but what my little accounting mind derived from reading Mandelbrot was not so much that he envisioned a ?solution? as he saw chaos that could only be interpreted in fractal generation.  What was so interesting and has been profitable to me in degrees I never thought possible, was his assault on Black Sholes.  His proof via the frequency of ?long tailed events? in the market entirely laid waste to the idea that a normal distribution could be applied to the market.  And further, that distantly out of the money options were dangerously UNDERPRICED.  Well, those 9000 contracts $.14-.21 October 38 QQQQ puts that I purchased in exactly the first 90 minutes of trading on September 19, 2008 became $8+ intrinsic before they expired in October.  How many bags is that?  No, I didn?t hold out for $8 intrinsic, but it was a big number.  Mandelbrot, obviously, rules in my book.

Conversely, when VIX spikes, it?s not time to buy premium.  The majority still rely on Black Sholes.  Who needs ?the solution? when you can see the fallacies on which others are writing options contracts?

Martin Armstrong has a very similar view of the non linearity of the market.  He sees multiple cycles converging to provide the ?perfect storm? or ?deadly wave? with chaos ordered by ?self generating? fractals or ?schema?.  His latest essay (?It?s Just Time? 10/8/08), which I believe is authentic, is amazing.  I?m into my tenth reading, at least, of it (err, the early chapters).

Very, very interesting people.  Wish I had a tenth of their insights.

From: realtraders@yahoogroups.com [mailto:realtraders@yahoogroups.com] On Behalf Of Bob Pardo at Mindspring
Sent: Tuesday, December 09, 2008 9:50 AM
To: realtraders@yahoogroups.com
Subject: RE: Re: Re:[RT] A note on Forecasting / Mandelbrot

I don?t think ?Mandelbrot conclusion has many conditions attached to it? is an accurate conclusion.

The fractal distribution has qualities that make it almost totally unlike the distributions used in classical statistics.

However, since it is rather obvious that billions of dollars have been earned using these ?flawed statistics? and variants thereof (see D. E. Shaw and Renaissance Technologies) it is also obvious that the entire matter is amazingly complex.

Since all of these firms are secretive almost to a paranoid degree, a determination of the actual technologies they employ will require a major piece of detective work.

As Sergey indicates, the devil is in the details.

Regards,

Bob Pardo

From: realtraders@yahoogroups.com [mailto:realtraders@yahoogroups.com] On Behalf Of Stan Rubenstein
Sent: Monday, December 08, 2008 9:33 PM
To: realtraders@yahoogroups.com
Subject: Re: Re: Re:[RT] A note on Forecasting

Is it possible that Mandelbrot conclusion has many conditions attached to it not spelled

out in your comment that has a bearing on it?

Also isn't it the "log normal" distribution that's applicable to financial stock returns

and not the normal dist? 

Curious

----- Original Message -----

From: SergeyTS

Sent: Monday, December 08, 2008 10:03 PM

Subject: Re: Re: Re:[RT] A note on Forecasting

Jim

These are too general statements about too general subject. The most important is in details. Here I agree with you.

And I use the models with a lot of added conditions. The complexity of some model is not a problem for the kind of research that I do.

As to Prediction Company and their technologies, I have some questions for you as a professional.

What exactly did you use from Chaos Theory:

1) Non parametric statistics? If so, how did you use it?

Information for those who are not familiar with it:

Mandelbrot found that the normal distribution is not working for financial data. It means that we cannot apply classical statistics for financial data.

For example, traditional calculation of profit of some trading system, or Black-Scholes option pricing model, are not applicable for the real stock market.  

2) R/S analysis? If so, how did you use it?

Information for those who are not familiar with it:

E.Peters uses R/S analysis a lot. And there are a lot of nuances there. I did article about this issue here:  http://www.timingsolution.com/TS/Articles/Chaos/chaos_ts.htm

Best regards,

Sergey.

  

----- Original Message -----

From: Jim White

Sent: Monday, December 08, 2008 8:15 PM

Subject: [Bulk] Re: Re:[RT] A note on Forecasting

Sergey,

All trading systems are based on some assumption about market behavior. In simple form a trading system says "If A occurs then B follows."An another example If an oscillator reverses in oversold territory, buy next bar at x price.We all know that such a system may have remarkable results over a given time period however in the long run it will fail because it does not accurately describe the way markets work. Markets can trend for long periods, yielding many false signals and failed trades. However, suppose we add another condition to the model that describes when the extended trend will end. Now we have a model that more accurately describes how markets work and should prove more reliable over longer periods. If we add enough conditions to accurately describe market behavior under a number of market scenarios, then we have a model that will have consistent returns over time and markets. And the statistics will be a realistic expectation of performance. This , of course, is the dream of all system builders.

You may make the case that markets are so dynamic that one can never detail conditions enough to create a model that will yield reliable performance over all time frames but I beg to differ. Both Mandelbrot and Peters agree that markets may be predictable in the short run. I, in fact use the work of both in my market model. And the Prediction Company certainly succeeded, did it not?

Jim

----- Original Message -----

From: SergeyTS

Sent: Monday, December 08, 2008 2:23 PM

Subject: Re:[RT] A note on Forecasting

Jim,

Static cycles are not my favorite or special.

The real question is a fundamental one: how to verify any trading strategy, based on anything.

10 years ago I have participated in a big research project. Its purpose was to test and verify different trading systems based on methods of technical analysis. Our group has found that the application of methods of classical statistics to the stock market analysis is an extremely dangerous thing.

Let me explain it better on this example.

Let say we have found a system that provides 70 winning signals from 100. The university's course of statistics says that this fact is not occasional with the probability of 99.5% (Chi Square=20x20/50=400/50=8 => P=99.5%) It means that we can assume that there is a high possibility that this system will work well in the future as it does in the present. And somebody may decide that the Holy Grail is found finally. But - it is not true. Statistics of the real stock market and the market's logic are different from this one. If the system works good enough for 100 current examples, it does not mean that it will work the same for other samples.

Jim, I want to emphasize that I do not name here the models that we used for the research. My group tried different things: TA indicators, risk/money management, arbitrage systems, then different math models (like Spectrum, autoregression), astro cycles as well. This problem still presents for all of them.

I believe that this problem is described well in these books:

1) "The (Mis)behavior of Markets"  of Benoit Mandelbrot; 

and 2) "Chaos and Order in the Capital Markets: A New View of Cycles, Prices, and Market Volatility" of Edgar E. Peters.

In financial analysis, we have to work with big data samples.

 Best regards,

Sergey

PS. Jim, it seems to me that you are mixing two different things: fixed (or static) cycles and dominant cycles. As an example, I would not believe if somebody states that the 20-days cycle is found that has worked for 20 years. From another side, if somebody states that withing the last 100 days the 20-days cycle has been found, it is quite possible.

Next 100 days there might be some other cycle (27-days, for example). It is closer to MESA and wavelet analysis, not to normal fixed cycles analysis.

----- Original Message -----

From: Jim White

Sent: Monday, December 08, 2008 4:27 PM

Subject: [Bulk] Re: [Bulk] [RT] A note on Forecasting

Sergey,

The inability of a methodology to return reliable and consistent performance is an indication that the underlying hypothesis is flawed. For example, methods based on static cycles or projections based on static cycles will have inconsistent performance over different stretches of time because static cycles are not fundamentally correct model of market activity.

There are characteristics of market movement and trader psychology that do not change over time and methods based on these will exhibit consistent performance. be it 100 or 700 samples.

Jim

----- Original Message -----

From: SergeyTS

Sent: Monday, December 08, 2008 11:52 AM

Subject: Re: [Bulk] [RT] A note on Forecasting

Hello, Jim

Actually, the question about financial statistics is a tricky one. The important things there are not only win/loss ratios, the intervals where these ratios are calculated should be considered as well. I have had many cases when a trading strategy worked very well for a half a year. And then it died forever.

As an example, see this intermediate backtesting result for huge intraday data:

cid:image001.gif@xxxxxxxxxxxxxxxxx

The system provided 65% good signals (469 win./ 247 los.) during some perios (several months).

After that 53% only, and then 59%.

100 trades is not enough to get the reliable statistics (we use at least 500 trades, in this example 700 trades).

One of this forum's participants is Robert Pardo, he can comment this better than me.

Best regards,

Sergey

----- Original Message -----

From: Jim White

Sent: Monday, December 08, 2008 12:31 PM

Subject: [Bulk] [RT] A note on Forecasting

My pivot trading methodology depends on anticipating and trading as close to the pivot points as possible. My argument is that trades near the pivot points are the lowest risk and highest reward points to trade. I operate my trading as a business - I buy inventory  and sell to capture a minimum profit margin. I have spent most of my trading career studying the characteristics of markets at turning points (pivots) and constructing trading tools to anticipate and trade near those points. These tools deliver consistent reliability of profitable trades between 70% and 80%.

I document my trading concepts by forward testing, not computer generated back testing. In other words I trade the tools in real time and record the results. For example, my latest application to the ESZ08 has generated about 78% profitable trades on a five minute chart over the past 6 weeks.

One of the issues I have with the people that post forecast on this list is that they do not provide reliability measures of their techniques. Failed forecasts are rarely addressed and specific application details are not provided. Consequently I usually delete them without consideration - after all - a stopped clock is right twice a day.

So I recommend that anyone who posts a forecast provide the statistics documenting the same performance of technique over at least 100 applications. For example my techniques are good within one bar of the forecast 70% to 80% of the time depending on market. With that information, readers can better judge the value of the post.

Jim White
Pivot Research & Trading Co.
PivotTrader.com


 

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