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I just wanted to throw this out for discussion to see what others thought.
I have noted in my investigation on systems and the market that there seems
to be one salient point that continues to show up and that is: There are
patterns in the market that, when utilized in trading, make a profit. The
pattern does not last forever and will change. When the pattern changes and
is no longer profitable then it is time to look for a new pattern or
"update" the existing parameters to bring about profitability in the extant
pattern. This is possibly the basis of why the walk forward MAY work but I
have not proceeded far enough along that line to prove or disprove this
point. If the above is true, his leaves one question and that is when to
exit a system or where is the "stop loss"? My answer up to this point is to
look at historical draw downs and number of losing trades, then add to this
a 10 to 15% margin for error. When the draw down or losing trades exceed the
marginal number then it is time to adjust. Of course, there is the
statistical probability that the longer you go the more the possibility of
an aberrant situation occurring. However, I'm not looking for perfection,
only a set of workable rules.
Another related point is, I've seen statements to the fact that short term
and day trading systems seem only to work for short periods (that "short" is
relative to 3 or 4 years, I guess) and do not hold up as well as longer term
patterns. It may be possible that if you were to set a correlation for
number of trades compared to periods of time you might find no better
results in the longer term patterns. As an example, there may be 700 trades
over a period of 5 years on a short term trading system until it "blows up".
If you were to subject a longer term system to 700 trades it may do no
better. I would guess the only data stream long enough to subject this to a
test would be the DOW and that only goes back to 1870 or so. Also when you
get to around 1923 you only have the "close" of the day for analysis from th
ere back. One person replied to this that the slippage and commissions were
the major fallacy on the day trading and swing system. However, commission
and slippage on 700 trades is the same whether over 5 years or 125 years
(except for inflation, etc.). Of course it could be viewed as percent of
profit to commission and if one could realize 125% a year for a day trading
system instead of 20%, why not go the short route.
These may end up being silly premises or way off the rails but if I can be
"wrong" and someone can come up with workable additions or solutions
regarding these I'm open. After all the only thing I'm after is a workable
system which of course includes high return per annum and low draw down.
Regards,
Michael McGahee
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