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System Development Paradigm

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Bangkok Thailand
Posts: 36 since May 2016
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System Development Paradigm

After spending quite an intensive couple of years in developing, backtesting and trading (all automated) various systems, I try to take a step back and evaluate the overall paradigm, and better define my objectives.

According to my understanding, there are 2 main schools of thought.

1. Identify resilient patterns that work in all, or many, different markets, and persist over many years. I understand this is what people like James Harry Simons and Jaffray Woodriff did (based on interviews I watched and read).

2. Don't aim at the holy grail, instead, use systems that fit a certain market regime, and for specific markets / instruments. Then, use dynamic position sizing and other ways to switch between systems in order to adapt. This kind of concept is communicated in the books of Howard Bandy and was described online in another forum by a trader called acrary.

Personally I use both systems that test well on all the data I have (and continue to perform nicely out of sample), and systems that worked only in specific periods, for example on the last 3 years.

It will be nice to stick to (1), but it is obviously easier to develop systems that are less robust as in (2). I also noticed that when fitting to specific market regimes, the yield (under the same risk profile) that can be generated is higher then when trying to find something that performed well over all of the data.

The question I struggle with: is the constant adjusting / adapting sustainable? don't you lose too much profit when moving from one system to another?

I recall from Hedge Fund Market Geniuses that Woodriff specifically mentions he became successful when he stopped developing systems that fit a single market and started to use patterns that work in all markets.

On the other hand, in changing markets, is it realistic to hope to find edges that didn't erode over 10 or 20 years?

It will be interesting to hear other opinions on this subject.

Last edited by TraderWalrus; August 30th, 2017 at 04:29 AM.
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