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Rick,
This is an excellent explanation! You've hit on the key points of interest that will keep most
most mechanical traders from pulling the plug on their systems--well after they should have
considered those # of losers and drawdown.
I generally use optimization only as a way to show system test results across a range of input
variables. I have used the "clustering" approach that you describe below (9, 10, 11, 12, 13, 15,
16, 17 day), but the trade by trade analysis is a new one. Thanks for the insight! This will
prove extremely helpful.
Dave Nadeau
Fort Collins, CO
--- Rick Parsons <RickParsons@xxxxxxxxxxxxxxx> wrote:
> You have to be very careful with optimized systems. They can look great on
> paper but many tend to fail once real trading starts. Analyze each trade
> closely. Is there only one or two trades with tremendous gains while there
> are many trades with many small losses? You need to see consistent profits
> thru out the entire testing periods. Another thing to look for is
> robustness. For example, if you optimize a system which uses a moving
> average and the best returns are for a 14 day moving average, check to see
> if you still get decent returns with a 9, 10, 11, 12, 13, 15, 16, 17 day
> moving average. If you still get decent returns that is a good sign. If
> the system falls apart when you try a 13 day moving average for example,
> then it is not very robust. You also need to look at the maximum number of
> losses in a row. For example it the maximum losses in a row is five, could
> you have stuck with the system had you started trading just as the first
> loss happened? Same with maximum drawdowns. Even though the system
> returned 100% on average, could you have stuck with the system if it had a
> drawdown of 40%? Although this is mechanical investing, very few can
> suppress their emotions when real money is involved. A lot of second
> guessing goes on. Moral: optimized systems are not the holy grail you
> think they will be.
>
> Rick
>
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