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4 System Rules - Which would you choose?
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4 System Rules - Which would you choose?

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4 System Rules - Which would you choose?

I think this is the appropriate forum for this kind of question.

I am developing a new method and have some backtesting results done which were then filtered 4 different ways.

My question to you is which of these outcomes would you consider the best?

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My stumble point has been the trade effeciency vs. overall $ profit per contract. I don't know which one is best...

I like high efficiency but passing up on essentially double the profit (net of commissions) seems like a somewhat stupid idea...

Any thoughts?

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  #2 (permalink)
Quick Summary
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4 appears more attractive to me.


Last edited by wuolong; February 21st, 2010 at 06:47 PM.
 
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I don't know if this would make a difference but here are the two of the equity curves...

The first attachment is for Outcome 1, the second attachment for Outcome 2.

As you can see both have minimal drawdowns but Outcome 2 has a decidedly more upwards and direct equity curve.

Outcome 1:

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Outcome 2:
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If that's the amount of data you have to go on, then personally I'd ignore it and go with the system that fit my understanding of the markets the best. Look, if I flip a coin 19 times I can easily get a "win %" around 80%. Should I trust that I'll continue to get 80% going forward? No way.

When you consider that the same goes for your average win and average loss, etc., they are essentially still unknown parameters, and the backtest data at best just gives you a warm and fuzzy feeling.

Trading platforms try to convince you that they tell you what you need to evaluate a strategy, but they absolutely do not. To name just one Statistics 101 issue: if you are taking a frequency count, and you want any chance of having a reliable prediction of future long-term results, you need that count to converge on a single level with diminishing variance over time. That's how you can verify that a coin has a 50/50 chance... even though you can get long runs of 100% heads, over time you settle on the 50% level with diminishing variance. But guess what, it can take 100's or 1000's of flips before you settle down properly on a value you can trust. Yet fancy backtest spreadsheets encourage retailers to bet their savings on 42 example trades, and no regularity analysis.

Just like in Vegas, they know that some backtest runs will get lucky and appear to win, and that customers will blame themselves or the markets when things don't work out as planned. It's a total con.

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Richard - Completely understand that this backtest is not statistically significant in ANY way.

My question I guess was more of a hypothetical on what is better... Higher efficiency (less trades, less profit, but higher profit per trade) vs. Lower efficiency (more trades, more Profit, but less profit per trade).

Which one is more advantageous? In general do you give something up to achieve more profit? Obviously more trades = more risk wich I can see as an obvious downside, but other than that i'm at a bit of an impasse.

Richard - you're crazy smart and some of your statistical .pdf's have left me in awe of applying mathematics to understand situations like this and I guess thats what i'm getting at... is there a mathematical advantage to one over the other?

Thanks for your help!

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daedalus View Post
My question I guess was more of a hypothetical on what is better... Higher efficiency (less trades, less profit, but higher profit per trade) vs. Lower efficiency (more trades, more Profit, but less profit per trade).

Ok, let's say you can trust your numbers, and that you can trust that future time periods will provide the systems with about the same number of trades as they had during the test. It really comes down to how deep your pockets are, and how much you care to risk.

If you want to make more total profit, you go with the one that made the most money. You might want to check risk of ruin and compromise, though, because often the best performing system long-term has the biggest drawdowns along the way!

On the other hand, if you want to be profitable at least x% of your days/weeks/whatever, you need to look at your profit factor versus the number of trades available to you as outlined here: How To Be Consistently Profitable in the Markets|Move the Markets (hard to believe I wrote that over 3 years ago now. ). This time, the danger is that you are profitable most of the time, but not by much. So, you starve by avoiding bad days.

Probably the best system for most people is somewhere in between, and no free lunches means you have to give up some profit for consistency, and vice-versa. Leverage on futures means you can also play games like seeing if doubling your size on system B makes it more attractive than system A, if system A makes more money with unacceptable drawdowns but system B earns less with a smooth curve.

I'm sure there are other philosophies and opinions about tuning a single system, but that's what makes sense to me.

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Awesome post. Thanks!

Since i'm a dunce when it comes to math can I throw some hypotetical numbers into your the profit factor equation and see if i'm on the same page...

Using the Avg. Profit (78.13), the Win 74%% (Win/Loss only, no Pars), and the Avg Loss (-70.00), and Loss% (26%)....


Then, 78.13 X .74 = 57.74,
and .26 X -70 = -18.26

Then does that mean that 57.74/-18.26 = -3.16 = a profit factor of 3.16?

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daedalus View Post
Then does that mean that 57.74/-18.26 = -3.16 = a profit factor of 3.16?

yeah, make the avg loss a positive number so 57.74/18.26 = 3.16

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daedalus View Post
Obviously more trades = more risk wich I can see as an obvious downside

This isn't totally true though. While more trades will obviously put more capital at risk, you reduce your risk that you are not just trading variance with more trades, especially since it will give you a much better feel if your EV+ after transaction cost.
Also why limit yourself to a or b or c or d?
What does it look like trading all 4 togather? What does it look like trading A + C + 1/2 capital/leverage with D and not trading B at all?

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^ I've actually kind of done exactly that and am trading two of the four in tandem and the results seem to be the best yet. While statistically insignificant, the current backtesting results (using around 400 trades) are yielding profit factors of 5.1 and 6.0 respectively.

And the results live with them have been exactly in line with the backtest results. To say the least i'm super stoked but again, without the help of Richard and others figuring out what really matters when looking for a profitable method i'd still be spinning my wheels.

Thanks again to everyone that kind of pushed me along into the right direction!

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