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KJ Trading Systems Kevin Davey - Ask Me Anything (AMA)
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KJ Trading Systems Kevin Davey - Ask Me Anything (AMA)

  #361 (permalink)
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@SMJCB Sorry, I haven't referred to what I do. I do not fully follow your line of questions. I was just discussing what I thought should be an obvious or self-evident fact. There are many more complex ways of making speculations. For example, one can use comparative reasoning or logic. As an example, we have a few cases where the price of Bitcoin has rallied when a country's currency has had trouble and/or government. One can use such comparative logic to look for countries who might experience currency crisis and buy Bitcoin/short the currency. Of course, this specific example has been a local phenomena and probably not trade-able. We've also seen that developed markets tend to be mean reverting. We can thus speculate or watch for new emerging markets to become more mean reverting. Comparative logic can also be used to reason about, price action or other types of things.

What I think that some of the best speculators do is they identify the factors (real factors) that trader's use to make decisions and form hypothesis about what is likely to happen and then they also understand price patterns (empirical patterns) and combine those insights to produce superior trading. I agree with Kevin that if you go to far to the right-hand side "too speculative" that it becomes more difficult to be consistent. In other cases, great speculators seem to be good at understanding when the market has mispriced an event. In any rate, I agree also it is extremely difficult to profit even from great predictions..

I'd rather shift this focus back to systems which is what Kevin does. I only interjected to provide my opinion, really fact, on what I thought should be obvious.

Anyway, there is also potential value in making your trading system output a prediction, or qualify score, versus a binary signal. Dr. Howard Bandy gave me some insights into this, and I have taken a liking to the concept. Let's just imagine you build your trading system to produce a signal. As part of your optimization process, you will make "local optimal' decisions as you optimize/craft your systems. At any rate, if you take the statistical/empirical view then each trade will have the same expectancy regardless of whether you take one trade or all the trades given the assumption that your system's trades are independent and don't rely on outlier profits. So, let's imagine you have a small account (like most new/small traders). What's likely to happen? You might build a few profitable systems and then lose interest as you won't have capital to deploy to even the profitable systems you have. Now, if you make your systems output predictions versus signals you can sort/rank the various signals and or do other sorts of interesting things. Of course, you need to find/define the quality factor. But, there are many sorts of things one can do with a score or quality factor (or prediction) that cannot be applied to a binary signal alone.

Anyway, Kevin have you ever used this idea of outputting a prediction or confidence value for a system or set of subsytems? I suspect you prefer to keep things simple and trade each system and track it. But, do you see anything wrong with the concept?


Last edited by tpredictor; December 12th, 2017 at 08:31 AM.
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  #362 (permalink)
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tpredictor View Post
@SMJCB

0 of 2! Oh well.

tpredictor View Post
I'd rather shift this focus back to systems which is what Kevin does. I only interjected to provide my opinion, really fact, on what I thought should be obvious.

I agree. Well on the 1st sentence at least. Lets not hijack Kevin's thread any more.

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  #363 (permalink)
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Sorry, SMCJB. One of the reasons I focused on predicting was because I felt a lot of the fake promoters/vendors claimed the, "I don't predict markets" as a way to avoiding making quantifiable (falsifiable) predictions giving them a way to hide behind basically such statements. To be honest, I have never heard a trader present a rational alternative argument that makes any sense. But, if we reason by analogy, one might look at poker or fixed/known odds games. Take a model based only on the hole cards with known values. Such a player doesn't need to predict because the hole cards have known values. However, the values in trading are not "known". But, if you take a view that you are playing a fixed odds game then you could argue that you don't predict instead you just know. But that sounds even stronger then prediction! One other possible view that might make sense is that you aren't predicting but somehow trying to find a "NASH equilibrium" solution . In this model, your profits are purely determined by random market factors (momentum, reversion, etc.): whatever you are doing is not predicting but rather attempting to lose as little as possible. However, your net profits are still a function of how well you predicted the market.

Here is Dr. Howard Bandy's exact sentiment on the matter of prediction (10:30).

https://www.youtube.com/watch?v=iBhrZKErJ6A

@fivewhy Basically what you are describing is combination system. A classifier (either human or machine learning) determines type of market and then you trade it with optimal algorithm. I think it makes a lot of sense and could work. The problem with Hurst or other sorts of measures is they are lagging. You will be predicting a "mean reversion" market when it is trending and vice versa unless the "half life" of the predictive cycle is longer then the cycle you use for determination. Most traditional systems, and Dr. Bandy explains this, are basically decision trees. Compared to methods like deep learning, decision trees have did not very well in pattern recognition. You would have to determine/find predictive factors/variables for these states. I think there is some value in keeping things simple, as Kevin often encourages. I think this could work and write about graybox (similar concepts) at my blog. You might want to first apply this to an already working, rules based, system you've developed. Start very simple.

But, this is good, also, because it aligns with my previous question. Dr. Bandy recommends moving from "impulse signals" to "state signals", curious Kevin about your thoughts on this and/or outputting predictions/quality scores vs binary signals? Have you tried other variations of output?

https://youtu.be/iBhrZKErJ6A?t=32m


Last edited by tpredictor; December 11th, 2017 at 10:04 PM.
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  #364 (permalink)
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SMCJB View Post
So your prediction's fundamental assumption is that history repeats itself.

One thing I always tell people is that regardless of your method, style, testing approach (or lack thereof), the market is the ultimate judge.

In the end, whatever process one uses to trade should be validated through real money results. That feedback loop is critical. Listen to the market, and if what one is doing is not working (is not profitable), then that is the cue that you should change something.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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  #365 (permalink)
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exits for limited feasibility check

Kevin, when you give a trade idea a quick first test - as I understood your webinars, you backtest a simpistic "system" with this entry and check the equity curve. What exit(s) do you use for that? Just a timed one or something else?

Maybe you answered it elsewhere - I haven't found it yet.

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  #366 (permalink)
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webradio View Post
Kevin, when you give a trade idea a quick first test - as I understood your webinars, you backtest a simpistic "system" with this entry and check the equity curve. What exit(s) do you use for that? Just a timed one or something else?

Maybe you answered it elsewhere - I haven't found it yet.

Thanks for the question. I usually use a time based exit (exit after X bars) and maybe a stop loss.

Many times, if this looks good, I actually just keep the simple exits, and not try to improve things with more complicated exits.


I should point out that testing an entry with simple exits makes the assumption that the entry is what really is important, and that is not necessarily the case. Many times the exit is more important, or even the interaction of the entry and exit is what really matters.

These days, I probably do more of entry and exit testing at the same time, because of the interaction effects...

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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  #367 (permalink)
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exits


kevinkdog View Post
Many times the exit is more important, or even the interaction of the entry and exit is what really matters.

Thanks for your quick reply, Kevin.

As I thought that I learned a lot, I wrote down what I learned and was suprised how short the boil-down about the exits actually was. I'd divide them roughly into
  • hard (initial stops and predefined targets)
  • timed (after x bars; at noon)
  • anxious/greedy (first probitable open; when x% of profit are eaten back)
  • trailing (from parabolic to trend reversal)
Am I missing something big in this area? Would you add any class or a representative exemplar to my list?
https://futures.io/elite-automated-trading/43183-collection-mechanical-stops-exits.html

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  #368 (permalink)
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webradio View Post
Thanks for your quick reply, Kevin.

As I thought that I learned a lot, I wrote down what I learned and was suprised how short the boil-down about the exits actually was. I'd divide them roughly into
  • hard (initial stops and predefined targets)
  • timed (after x bars; at noon)
  • anxious/greedy (first probitable open; when x% of profit are eaten back)
  • trailing (from parabolic to trend reversal)
Am I missing something big in this area? Would you add any class or a representative exemplar to my list?
https://futures.io/elite-automated-trading/43183-collection-mechanical-stops-exits.html

reverse entry signals (exit short and then go long with same signal)

using different "entry signal" as exit (take something you think would be a nice entry, but just use it for an exit)

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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Backtesting

Hi Kevin: I have a general question about backtesting on different bar types. Let's say I run a system in real time on a renko bar type for a week (I understand that a week isn't statistically significant - it's just to get a general idea). At the end of the week I compare the results to Strategy Analyzer simulator results. I then calculate the slippage between the simulated and live results. In order to use the slippage factor, I add/deduct the slippage average to the profit target/stop loss. Do you see any problem with that going forward? For instance, on the UB if I have a slippage average of 2 ticks and my profit target is 6 ticks, I would reduce my profit target to 4 ticks for live trading. Stop loss is always 4 ticks. I felt this was a more accurate way to calculate slippage rather than using the slippage from the Historical Fill Processing option. I've traded live using this method and it seems to be okay as long as I get filled at the entry price (this is a problem sometimes in bonds).
I appreciate your input on this. Thanks.

Also, I execute manually. This is not intended for automation. The goal is to estimate the most likely successful target for this system.


Last edited by phantomtrader; January 9th, 2018 at 11:33 AM.
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  #370 (permalink)
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phantomtrader View Post
Hi Kevin: I have a general question about backtesting on different bar types. Let's say I run a system in real time on a renko bar type for a week (I understand that a week isn't statistically significant - it's just to get a general idea). At the end of the week I compare the results to Strategy Analyzer simulator results. I then calculate the slippage between the simulated and live results. In order to use the slippage factor, I add/deduct the slippage average to the profit target/stop loss. Do you see any problem with that going forward? For instance, on the UB if I have a slippage average of 2 ticks and my profit target is 6 ticks, I would reduce my profit target to 4 ticks for live trading. Stop loss is always 4 ticks. I felt this was a more accurate way to calculate slippage rather than using the slippage from the Historical Fill Processing option. I've traded live using this method and it seems to be okay as long as I get filled at the entry price (this is a problem sometimes in bonds).
I appreciate your input on this. Thanks.

Also, I execute manually. This is not intended for automation. The goal is to estimate the most likely successful target for this system.

Thanks for the question.

Hopefully by "live" you mean real money trading, I will assume that is the case.

I am a bit confused by what you are doing, maybe you can explain with an example. Here is an example of how I'd calculate it:

1 trade

Backtest Report says I bought at 163 19/32 and sold at 163 25/32

Actual real money account says I bought at 163 19/32 and sold at 163 24/32

I would have 0 ticks slippage on entry, 1 tick slippage on exit.

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