Post Tagged with: "Backtesting"

Finding Out What Works, And What Doesn’t Work

August 22, 2016 5:00 am12 comments

Many traders who try system trading have previously had difficulty at discretionary or manual trading. Most of these folks eventually recognize the benefit of trading a system with well defined rules – a system that has performed well in the past. It is nice to know a trading approach has historically worked, but as with all things related to trading, past performance is no guarantee of future results. Unfortunately, many people who try systematic/algorithmic/mechanical/rule-based trading for the first time bring along a lot of the baggage that they have acquired from their previous method. Depending on the pre-conceived notions they bring into mechanical trading, these new systematic traders may run into a lot of frustration and trouble. Many times, for […]

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System Parameter Permutation Beats Data Mining Bias

June 20, 2016 5:00 am11 comments

Recently, an interesting new perspective has emerged regarding trading system development. The National Association of Active Investment Managers (NAAIM) has just announced a $10,000 Wagner Award for Dave Walton of StatisTrade for his pioneering work in exploring a new method for trading system development, which he calls System Parameter Permutation (SPP). It’s a well-merited prize, since SPP neatly solves the age-old issue of data mining bias. This article will summarize the implications of System Parameter Permutation, and the entire 33-page paper can be downloaded here. SSP is exciting because it opens up an entirely new horizon in trading system development. It has the power to help boost quant traders to the next level, so it’s worth taking a careful look. Many […]

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Top Five Most Popular Articles From 2015

January 4, 2016 5:00 am0 comments

Happy New Year system traders! With the new year it’s time to take a look back at 2015 and highlight the top five most popular articles. These articles all provide great material to help you in your systematic trading. Did you miss any of these articles? If so, now is your chance to review this popular material and see where it might fit into your system development process. I determined the top five articles based upon the number of views the article received. So let’s get going by starting with the 5th most popular article for 2015… Number 5 Connors 2-Period RSI Update For 2014 Once again the simple 2-period RSI trading models popularized by the book, “Short Term Trading Strategies […]

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Secret Weapon of Stock & ETF System Development

August 31, 2015 5:00 am0 comments

This is the second article in a two-part series where I discuss the top three pitfalls when backtesting Stock & ETF trading systems. In the first article, The Top Three Pitfalls of Stock and ETF System Development, I highlighted the top three issues system developers face. In this article, I’m going to show you how I fixed this problem to give me precise and accurate historical backtested results. As many of you know, I designed the ETF trading strategies for Tuttle Tactical Management. This firm manages over $200 million in ETFs. I started working with Tuttle in 2007. One of the reasons why I was hired as a consultant was due to my expertise in developing realistic equity backtests. Being […]

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The Top Three Pitfalls of Stock And ETF System Development

August 24, 2015 5:00 am0 comments

During my nearly 25 years of experience in the trading business, I have talked to many traders about system development. Futures trading systems and back-adjusted contacts are fairly well understood. Recent issues with the pits closing and markets being only electronic have created some issues but it’s still relatively straight forward to design a trading system which can beat, for example, the Barclay Systematic Traders Index. I have found the same to not be true for stock and ETF systems, even though both security types are more accessible to the general public. This seems to be for several reasons. First, the standard split-adjusted data series used by itself in backtesting has severe limitations when testing on a portfolio. I’ll detail […]

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Fooled by Monte Carlo Analysis

June 1, 2015 5:00 am11 comments

–by  Michael Harris from Price Action Lab Simple Monte Carlo analysis tools are often used to assess the risks of trading systems and to determine appropriate capitalization levels. However, simple trade reshuffling algorithms can produce misleading results in many cases and fool their users. There are several Monte Carlo analysis tools available to traders. Some of these are even distributed for free via popular forums and blogs. Although these tools can be useful in certain cases, they can also produce misleading results when the following conditions are true: The systems are highly curve-fitted and/or have high win rate. There is forced long/short symmetry in trade generation. The systems operate in longer-term trend following. The systems take trades that depend on the outcome […]

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9 Mistakes Quants Make that Cause Backtests to Lie

May 18, 2015 5:00 am4 comments

              “I’ve never seen a bad backtest” — Dimitris Melas, head of research at MSCI. About backtests A backtest is a simulation of a trading strategy used to evaluate how effective the strategy might have been if it was traded historically. Backtestesting is used by hedge funds and other researchers to test strategies before real capital is applied. Backtests are valuable because they enable quants to quickly test and reject trading strategy ideas. All too often, strategies look great in simulation but fail to live up to their promise in live trading. There is a number of reasons for these failures, some of which are beyond the control of a quant developer. But other […]

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Are your backtest results fooling you?

May 11, 2015 5:00 am2 comments

Have you ever started trading a strategy that performs well in the backtests but delivers a very different result when you begin trading it with real money? Could your backtest reports be fooling you by indicating a strategy is great but really only showing you part of the overall picture? How do you give yourself a better chance of developing trading systems that are robust and perform well going forward? Kevin Davey (not the guy pictured above!), World Cup Trading champion from, has been creating trading strategies for over 25 years. In Episode 5 of the BetterSystemTrader podcast he says: It’s amazing how easy it is to create systems that you think are good that just fall apart. –… Click To Tweet To reduce […]

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Deterministic Machine Design of Trading Systems With Strict Cross-Validation

April 13, 2015 5:00 am10 comments

— by Michael Harris from Price Action Blog. A high win rate trading system for SPY was machined designed using a deterministic method and a simple predictor of price. Cross-validation of in-sample results was performed on out-of-samples of SPY and of an anti-correlated security. The results show that high win rate trading systems with appropriate risk:reward ratio can be machined designed that are even profitable on an anti-correlated market. Definitions Deterministic machine design of trading systems is a process that produces the same result each time it mines the same data with the same design parameters. This is a process compatible with the requirements of scientific testing and analysis. Note that most machine design algos based on neural networks or genetic algorithms do not in general produce […]

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Win Rate: The Most Important Performance Measure

February 9, 2015 5:00 am36 comments

– Michael Harris, Price Action Lab Blog Shortly after my post on Kelly maximization I received a number of emails from traders who are developing systems but are, understandably so in my opinion, a bit confused about which performance criterion or criteria to use when evaluating them. I understand why those traders are confused, or to be more exact, what or who has confused them and why. The most important criterion to use when measuring the performance of a trading strategy is its success rate, a.k.a. win rate. A year ago, in the post “What Every Trader Should Know About the Win Rate, Profit Factor and Payoff Ratio“, I mentioned a formula I derived 20 years ago that first appeared in a […]

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