Modeling Trading System Performance
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1 Index 377 INDEX absorbing barriers 48-50, 52, 70-71, , account risk 194 accuracy 222, card counting, 59, 60, 63 control chart, 257 correlation, 173 estimate future performance, 118 risk measurement, 218 simulation, 85, 103, 104, 189, 191 trade, 7, 9, 15-16, 19, 28, 33, , , 183, 187, 202, 219, 222, , AmiBroker 9, 36, 88, 170, Analyze_Distributions anchoring 113 Anderson-Darling 82, anti-martingale autocorrelation 237, 269 backtest 7, 12, 17, 31, 75, 275, , 280, 291, 334 Baldwin paper 59 bankroll 47-48, 50, 52, 60-72, 91-95, 194 bankruptcy 2, 6, 52, 67, 94-96, 107, 186, 275 bar length daily data bars drawdown and 121 hourly data bars intra-day monthly data bars multiple 116 profit and 121 quarterly data bars risk and 118 sweet spot weekly data bars yearly data bars barriers, absorbing 4, 48, 52, 64, 70-71, , 155, 186, 192, 197, 201, , 218 Bayes, Thomas 268 Bayesian statistics , bearish market behavioral economics 113 behavioral finance 113 benchmark 14-16, 32, 232, 249, 253, 261, 278 Bernoulli process see binomial distribution beta betting systems anti-martingale constant bet size Martingale bias, optimistic binary distribution binomial distribution blackjack bankroll analysis basic strategy card counting expectancy rules trading similarity 71-72
2 378 Modeling Trading System Performance broken, is it? 31, 106, 183, 192, Brownian motion 51, 61 Build Table routine bullish market business, trading as 2, 4, 6, 29-34, 68, 72, , 274, 281 capital 107, 274 capital asset pricing model (CAPM) 166 CAR see compounding CAR / MDD 112 casino 45-50, 54-72, 91, 280 Goldilock s central limit theorem 81-82, , 190, 223 chi-square test 82, 251, , commissions commodity 16, 19-28, 31, 116, 157, , 186, , 204, 290, 293 comparing means compounding 12, 18, 23, 31-32, 64, 75, , 125, , , 173, , 199, 271, 275, 290 consistency 106, 219, 202, 257, 277 control chart correlation 9, 16, 51, 144, , , 173, , 222, , 275, product-moment rank cumulative distribution function (CDF) 78-91, 108, 193, , , , , see also inverse CDF curve fitting 39 cycles 38 daily data bars data daily fundamental 5 hourly intra-day large amount required 5 monthly overnight 143, quality quarterly weekly yearly DD see drawdown decision under uncertainty 106 degrees of freedom 227, 249, 254, 265, Deming, W. Edwards 257 deterministic 245 development, trading system distributions 76-78, 97, , , , diversification 166 drawdown (DD) , 121 buying opportunity 203, 274 close to close 126, , 134, 136, 139, 141, 145 intra-trade 120, 124, maximum 112, 195 terminal wealth and 110 tolerance 107 drunkard s walk Durban-Watson Eckert, Prespert 74 efficient market 6, 166 entries 38 equity see terminal wealth relative
3 Index 379 Equity_to_BuildTable equity curve 6, errors estimation 7 Type I and II ES vs SPY 160 ETF see exchange traded funds events, independent 51 Excel 4, 13, 88, 193, , 237, 247, 249, , , 337, lookup rand exchange traded funds (ETF) 6, 15-19, 38, , , , , , 198, , 235, 275, exits 38 expectancy see expectation expectation 3, 43-52, 54, 57-60, 63-64, 66-72, 88, 91, 96-98, 170, , , 212, 219, 222, 274, blackjack must be positive 44-45, 274 negative, dealing with roulette falling markets Fisher, Sir Ronald 229, 268 fit, goodness fitness function see objective function forecast horizon 107 FOREX 116 fraction betting 187 optimal 188 see also position sizing framing Frankel, Stanley 74 freedom, degrees of 227 frequency of trading frequentist statistics , fundamental data 5 futures 196 gambling 4, 6, 33, 43-72, 113, , game theory 113 geometric return 188 goal 2, 32-33, 186 Goldilock s casino goodness of fit 82, , health, system 2, 8, 14-15, 31-33, 41, 104, 106, 177, 183, 192, 198, , , , 274, 278, holding period 5, horizon, forecast 107 hourly data bars hypothesis null 232 testing iid see independence in-sample (IS) 7, 31, 38-40, , 261, 277, 291 independence 51, see also correlation see also serial dependence intended readers 5 intra-day trades intraocular impact test 224, 260 InvCDF_to_List 312 InvCDF_to_Trades inverse CDF 84-86, 88, 90, 193, 240, , roulette 88-89
4 380 Modeling Trading System Performance IS see in-sample issues Jones, Paul Tudor 186 Jones, Ryan Kahneman, Daniel 113 Kelly formula , John 6, 186, 191 key topics 4 Kolmogorov-Smirnov 82, kurtosis Laplace, Pierre-Simon 268 large numbers, law of 81-82, 223 leverage 166 frequency and see also position sizing liquidity 3-5, 9, 31, 118, 151, , 177, , 275 List_to_InvCDF List_to_pdf List_to_Trades losing trades MAE see maximum adverse excursion managed accounts ratio (MAR) 112 see also CAR margin 9, 14-15, 23, 120, 199, 328 Martingale betting maturity of traders 3 Mauchly, John 74 maximum adverse excursion (MAE) mean regression 38 means, comparison memoryless 223 Mersenne Twister 88, metric 106 Metropolis, Nicholas 74 model logic and rules 38 Modify_pdf moments monitor results 41 Monte Carlo simulation applications background 74 binary casino 74 dice example 79-82, history 74 overview 3-4, 6-7, 9, 12-28, 48-50, 58, 122, 207, 247, , 330 position size 186 process 75 roulette monthly data bars Morgenstern, Oskar 113 MTSP Simulation 283 multiple trades per day noise 32, 37, 39, 186, 203, 276, 279 normal distribution 81, 83-86, 228 objective function 3, 37, 39-40, , 170, 176, , , 213 OOS see out-of-sample opening price 116, optimize 3, 39-40, 98, 188, 199, 291 options 187, orders intra-bar limit 118 out-of-sample (OOS) 2-3, 6-7, 21, 31, 39-40, 104, , 205, , 261
5 Index 381 outlier 237, , 263 over fitting 39 overnight trades 143, , paper trades 7, patterns 38 Patterson, Nick 279 Patterson, Scott 279 pdf_to_invcdf pdf_to_list 311 Pearson, E. S. 251 perfect signals 170 performance estimating future 40 periodicity , 224 Please, N. W. 251 poker 279 population , 225, , 264 portfolio 3, 166, , 187, 198, position sizing 2, 4, 13-16, 67, 98, 111, 126, , 173, 176, 180, , 271, 275, , , , basic unit comparison constant examples expectancy and 45 fixed ratio 200, fractional 23-28, , generalized ratio margin 199 monitoring 203 volatility weighted Posten, Harry 251 practice 2, 40, 106, 235, 274 probability 2, 4-6, 12-13, 18, 22-24, 45-52, 64-67, 97, , 178, 205, , 271, 287, 291 density function (pdf) 76-86, 109, 187 refresher roulette probability mass function (pmf) see probability density function profit potential 121 programming skills 274 prospect theory 113 p-value 232 quantitative development quarterly data bars Rand Corporation 75 random 7, 15, 32, 51, 61, 63, 75, 78-79, 84-91, , 119, 122, 169, 195, 207, 223, 231, , 245, 261, 277, 280, 296, , 324, 328, readers, intended 5 realization 75 relative strength 38 Renaissance retire barrier 107 return, geometric 188 rising markets risk: account 194 aversion 114 bar length position size ruin tolerance 194 trading system robust roulette 43-52, 59, , ruin, risk of 64-66, 107
6 382 Modeling Trading System Performance runs test sample Schwager, Jack 186 seasonality 38 semi-deviation 202 serial dependence Shannon, Claude 6, 186 Shewhart, W. A signal 37 simulation accuracy Monte Carlo setup skew 226 slippage 151 Snyder, Arnold 60 Soros, George 202 standard deviation 31, 57, 61-67, 81, 83, 97, 109, , 192, 195, 198, 202, , , 234, 244, , , 274, stationarity 7, 197 statistics 38, Bayesian, , descriptive, 222 frequentist, , 268 inferential, , skills 274 StdNormal_to_List straw broom charts 17, 21, , 207, 276 success, requirements for surrogate sweet spot synchronization 32, 39, 103, 203, system, trading 30-31, accuracy 202 desirable characteristics development entries 38 ETFs examples 8-28 exits 38 fails 39 frequency futures model plus data 37, 276 monitoring 203 stocks 9-15 see also broken t-test when to use 250 technical analysis 37 terminal wealth relative (TWR) , , test Anderson-Darling chi-square choice of Durban-Watson Kolmogorov-Smirnov runs t Text_to_InvCDF Thaler, Richard 113 Thorpe, Ed 6, 59, 186 tradables trading account 30 trading frequency 2, 5, 31, 107, 192, , vs leverage trading system see system, trading Trades_to_Equity trend following 38 Tversky, Amos 113 TWR see terminal wealth relative Type I and II errors
7 Index 383 Ulam, Stanislaw 74 uncertainty 2 utility theory variance 226 Vince, Ralph 188, 199, 201 von Neumann, John 74, 113 walk forward 3, 7-8, 40-41, 203, weekly data bars Wilconxon 256 Winsorize 251, wizard of odds yearly data bars
8 384 Modeling Trading System Performance
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