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Category Archives: Trading System Analysis
Fooled by Random Backtesting
Backtesting trading systems on historical data is again becoming popular almost 30 years after it started being used by individual traders due to recent advances in web technology and server speed that allows its online implementation. If one knows what … Continue reading
Posted in Trading System Analysis
Tagged backtesting, intraday trading, market participants
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Significance of a System For Trading SPY
The SPY2p5 system was machined designed on April 4, 2012 by Price Action Lab using an in-sample from SPY inception (01/29/1993) to December 31, 2008. Then the system was validated on unseen data, called the the out-of-sample, from January 2, 2009 … Continue reading
Fooled by Randomness and Monte Carlo Simulations
Random trading can produce high positive returns as well as very low negative returns. In a post a week ago with the title Random Trading Versus Trading Randomly I included distributions from random SPY trading and I showed how they impose limits … Continue reading
Random Trading Versus Trading Randomly
Suppose a trader has purposely used a random system to trade SPY since its inception. What was the probability to make annually more than the buy and hold return? Or suppose a trader has worked hard to develop a trading system that generated a positive … Continue reading
Posted in Market Statistics, Trading System Analysis
Tagged buy and hold, fooled by randomness, p-value, random trading
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Filtering Out Nearly Flat Days in a Moving Average Crossover System – Part I
This is Part I of a series of posts that deal with the concept of filtering out nearly flat days below some volatility threshold when calculating the moving averages of a crossover system. Specifically, the analysis in the series will attempt to answer whether … Continue reading
Posted in Market Statistics, Technical Analysis, Trading System Analysis
Tagged trend-following with volatility filters, volatility based moving averages, white noise filtering
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Passive Investing in Stock Indices Involves Substantial Risks
I have heard a lot of arguments in favor or against active fund management and passive investing. I present data here that strongly suggest that passive investing in stock indices should be actually treated as an alternative investment that involves substantial risks, or … Continue reading
Posted in Trading System Analysis, Trading System Design, Trend following
Tagged Active management, passive investing
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Trading Style and Age
Trading style and age are related to some extent. It is not a matter whether one can design and automate intraday medium frequency system but whether the constant research and updating that is required when involved with this trading timeframe can be … Continue reading
Posted in Trading System Analysis, Trend following
Tagged intraday trading, longer-term trading, position trading, swing trading, trading timeframe
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Is There Any Future in Equity Index Trend-Following?
The problem of trend following is fundamentally simple: choppy markets reduce the effectiveness of trend-following algorithms and shorter trend durations reduce their profitability. There is no need for a more sophisticated analysis. About 15 years ago I derived an equation that describes the problems … Continue reading
Posted in Trading System Analysis, Trend following
Tagged autocorrelation, HFT, payoff ratio, profit factor, profitability rule, trend following
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A Robust Trading System Across the ETF Board
In this post the performance of the machine generated SPY2p5 trading system is analyzed for 10 ETFs with various degrees of correlation with SPY, ranging from highly correlated, to non-correlated and highly anti-correlated. The performance since the development of the system has been truly amazing across … Continue reading
Posted in Price Action Lab Patterns, Trading System Analysis, Trading System Design, Trading System Synthesis
Tagged SPY2p5 system analysis
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Backtesting Robustness Index
In this post I introduce the general form of the Backtesting Robustness Index (BRI) I have developed and I give an example of its application to price patterns. This robustness index provides just another way of dealing with the notorious problems … Continue reading
Posted in Trading System Analysis, Trading System Design, Trading System Synthesis
Tagged backtesting robustness index, curve-fitting, optimization, pertubation
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