February 8th, 2010 · Books
Over the New Year break I read the illustrated Cartoon Guide to Statistics which was great to go over the basics of classical statistics, and the format makes it easy to pick it up for a few minutes reading. I have also been recommended, and bought Statistics Unplugged – which deals with the same topics more in depths. But to be honest it still sits untouched on my desk…
Another area of statistics which very often comes up in the context of serious trading system development is Robust Statistics. I have not found a good book to leave unread on my bookshelf on Robust Statistics yet so I’ll have to make do with with an unused bookmark on the wikipedia article ;-)
William Eckhardt
Anyway, Bill Eckhardt is a succesful automated trend follower doubled with a PhD in Mathematics. He was also Richard Dennis partner in the Turtle Trading experiment. I re-read his interview in New Market Wizards where he emphasises on a few concepts such as understanding statistics, bet size, and even psychology.
Here are some interesting inssights from the book interview (starting pg 107): [Read more →]
Tags: eckhardt·Market Wizards·Stats
February 4th, 2010 · Backtest
This post is trying to present a process to determine your bliss function, as a follow-up to the previous post introducing the bliss function concept.
Master Chef Paul Fraser - photo: Peter-Duke@flickr
We’ve seen that the bliss function is not a universal function but needs to encapsulate
your own criteria for evaluating a trading system. Similarly to popular dishes, everybody has got their own recipe based on their personal preferences.
Well, “building” your bliss function is a bit like making up your own recipe: you first have to choose the main ingredients (return, variance, risk, etc.) and mix them in a way that makes sense and in the right proportions. Most great chefs perfect their recipes through trial and error. The process can equally be applied to the bliss function.
Please note that my bliss function recipe is not finished. I am merely floating the idea of how I am planning to establish my bliss equation. Please feel free to comment if you have any comments on super ingredients you know about: at the Au.Tra.Sy restaurant, everybody can help in the cuisine!
Main ingredients and proportions
First, you have to decide what will be in your recipe. The base ingredients will probably be return, variance and risk. These can be declined in several flavours which you must choose. In the previous bliss function post, we looked at the following comparison of 2 different systems: [Read more →]
Tags: bliss function·optimisation·robust
David Varadi, from the very good CSS Analytics blog, pointed me to his interesting findings on a Mean Median Divergence Indicator (MMDI) he devised as a replacement to the standard MACD.
I wanted to test the MMDI as a follow-up to Moving Median: a better indicator than Moving Average?. This also provided a good opportunity to test Trading Blox (which I am thinking of buying).
MMDI: What is it?
In short, this is an indicator very similar to the MACD, except that the short moving average of the MACD is replaced by a moving median.
Portfolio Filter: Trade with the trend
One concept often used to improve the edge of a trading system is to look at 2 or more timeframes. The main timeframe (shorter one) is used for triggering trading signals (eg Donchian Channel breakouts), and the longer timeframe is used to determine the direction of the main trend. The filter rules prevent any trade signal to be taken if it goes against the main trend.
Trading Blox: a componentized testing framework
A great feature of Trading Blox is that it provides you with a skeleton workflow that forms the framework for the backtesting process. What this means is that Trading Blox implements and runs its logical workflow in the simulation loop (ie read data, update indicators, check entry signals, check exit signals, post-simulation scripts, etc.) but provides you with hooks at every step (about 35 hooks per simulation loop) where you can write your own code for customisation (with access to Trading Blox internal objects). [Read more →]
Tags: robust·screenshots·Trading Blox·Trend Following
AQR is a top hedge fund, managing around $24B in Assets. Lately, they have been making noise about their moving into the Managed Futures space (a.k.a. Trend Following). They seem to be working at institutional investor’s acceptance of trend following as an “investment” concept. They might just be trying to catch up with another mammoth hedge fund: MAN who have been strong in this space since taking AHL over.
A research paper (summarised below) was recently published by AQR, explaining some concepts of trend following.
Clifford Asness, AQR Managing & Founding Principal, was also invited to speak about it with his good friends at CNBC (he is also an ex-Goldman, so he surely has lots of connections with the media and government). The video is not that interesting but here it is below, anyway. If you’re short of time (aren’t we all?), I recommend you skip to the paper (8 pages) or the summary, which yield more interesting insights. [Read more →]
Tags: AQR·research paper
January 26th, 2010 · Futures
Locked-limit panicked trader?
photo: artemuestra@flickr
Every prudent trader will ensure they minimise their risk by placing stop-loss orders where they should get out of the market. This is one of trading basic truths:
Cut your losses short.
However there is one case where the Futures market will not let you exit at any price: when the market is locked-limit. [Read more →]
Tags: lock-limit·options
January 23rd, 2010 · Off-track
I really enjoyed reading Jack Schwager books (Market Wizards and New Market Wizards) where he interviews top traders. So, I was pretty pleased when I found this presentation video where Schwager goes over his findings on what makes great traders. Entertaining and worth a watch at the weekend…
His material is not directly linked to automated trading but there are still relevant points to system development and trading strategy.
Jack Schwager
He starts with an empirical rebuttal of Random Walk Theory and explains that there is no holy grail. He then covers most of his points by giving anecdotes and insight from the traders that he interviewed in his books (Jim Rogers, Ed Seykota, Larry Hite, etc.).
Some notes from the video (link further below): [Read more →]
Tags: Jack Schwager·Market Wizards
January 21st, 2010 · Backtest
Backtesting mechanical trading systems involves a great deal of optimization: testing and running a system across a myriad of parameters to choose the one(s) that produce the best results.
But what is “best”?
How do you measure best results, though? Compound Annual Growth Rate (CAGR) is one of the first metric that comes to mind (it is the simplest and most direct one). However consider this:
System B produces a greater CAGR – at the cost of much larger variability in the results. I don’t know about you, but “to a point”, I would rather obtain a smoother equity curve and slightly worse CAGR (i.e. choosing System B).
This reasoning leads to [Read more →]
Tags: bliss function·Ed Seykota·optimisation
Not a good year for Trend Followers! Closing December with a performance of -4.37% on average, most funds we follow “saw red” in 2009 (-7.3% on average). Well, this is part of the game: you have to risk (and lose) some to make some…
Even the “mammoth” funds that are Man or Transtrend finished the year in double digits negative territory.
With no further ado, here is the last Trend Following Wizards update for 2009: [Read more →]
Tags: Abraham Trading·AHL·Aspect Capital·Bill Dunn·Chesapeake·Christian Baha·Clarke Capital·dave harding·Drury Capital·eckhardt·EMC Capital·Hawksbill·Howard Seidler·Hyman Beck·John W Henry·Larry Hite·Liz Cheval·Man·Millburn Ridgefield·Paul Rabar·Saxon Investment·Superfund·Tom Shanks·Transtrend·winton capital
While searching for robustness, you might come across the term of robust statistical estimator: the median, for instance, is a robust measure of central tendency, while the mean (average) is not (the latter is much more sensitive to outliers).
Robustness in trading is a tough beast to tame and understand. The more “robust” the research and development process, the better (read: robust) the results ought to be, right? With this in mind, I decided to test robust “tools” within the actual mechanical trading strategy itself.
The moving average indicator is so ubiquitous in trading that most folks (me included) use it without second thoughts. Its legacy probably dates from the era of expensive and complicated computing (it is relatively inexpensive to compute), so I wanted to revisit its hegemony – and give it a run for its money: by pitching it against a moving median indicator (on the basis of better statistical robustness for the latter).
Could it be that a moving median is actually a better indicator than the moving average?… [Read more →]
Tags: average·comparison·crossover·median·performance·robust·Trend Following
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