New posts

Reply to thread

Message

A concern that I have with any system is that initial results may show some excellent profit or devastating loss........ based on a few trades that are a small portion of the whole.....

Would it be prudent to limit the size of the profits and losses from the outset so that the trade sizes would be uniform to begin with..... ie....evaluate to see if there is a good distribution of profitable trades throughout the test period....... and then look for increased profits one the basis of the system is established.

I am not of a math background so I am not sure if it makes sense........... lol

Someone else may have some insights.

quote from 'Mechanical Trading Systems'by Weissman

In his book, Design, Testing and Optimization of Trading Systems,
Robert Pardo discusses a phenomenon that he calls outlier curve fitting.
Outlier curve fitting occurs when a single trade makes up a disproportionate
percentage of a trading system’s profits (Pardo specifically warns
against performance histories in which a single trade accounts for over 30
percent of a system’s profits.9) Certain types of trading systems are more
susceptible to this problem than others. In general, because mean reversion
trading systems exit with profits when the market reverts to its mean, outlier
curve fitting is unlikely. By contrast, trend-following systems have a
much greater tendency to contain single, disproportionately large profitable
trades within their performance histories.

<blockquote data-quote="daveM" data-source="post: 478888" data-attributes="member: 28061">A concern that I have with any system is that initial results may show some excellent profit or devastating loss........ based on a few trades that are a small portion of the whole.....Would it be prudent to limit the size of the profits and losses from the outset so that the trade sizes would be uniform to begin with..... ie....evaluate to see if there is a good distribution of profitable trades throughout the test period....... and then look for increased profits one the basis of the system is established.I am not of a math background so I am not sure if it makes sense........... lolSomeone else may have some insights.quote from &#039;Mechanical Trading Systems&#039;by WeissmanIn his book, Design, Testing and Optimization of Trading Systems,Robert Pardo discusses a phenomenon that he calls outlier curve fitting.Outlier curve fitting occurs when a single trade makes up a disproportionatepercentage of a trading system’s profits (Pardo specifically warnsagainst performance histories in which a single trade accounts for over 30percent of a system’s profits.9) Certain types of trading systems are moresusceptible to this problem than others. In general, because mean reversiontrading systems exit with profits when the market reverts to its mean, outliercurve fitting is unlikely. By contrast, trend-following systems have amuch greater tendency to contain single, disproportionately large profitabletrades within their performance histories.</blockquote>

[QUOTE="daveM, post: 478888, member: 28061"] A concern that I have with any system is that initial results may show some excellent profit or devastating loss........ based on a few trades that are a small portion of the whole..... Would it be prudent to limit the size of the profits and losses from the outset so that the trade sizes would be uniform to begin with..... ie....evaluate to see if there is a good distribution of profitable trades throughout the test period....... and then look for increased profits one the basis of the system is established. I am not of a math background so I am not sure if it makes sense........... lol Someone else may have some insights. quote from 'Mechanical Trading Systems'by Weissman In his book, Design, Testing and Optimization of Trading Systems, Robert Pardo discusses a phenomenon that he calls outlier curve fitting. Outlier curve fitting occurs when a single trade makes up a disproportionate percentage of a trading system’s profits (Pardo specifically warns against performance histories in which a single trade accounts for over 30 percent of a system’s profits.9) Certain types of trading systems are more susceptible to this problem than others. In general, because mean reversion trading systems exit with profits when the market reverts to its mean, outlier curve fitting is unlikely. By contrast, trend-following systems have a much greater tendency to contain single, disproportionately large profitable trades within their performance histories. [/QUOTE]

Verification