Comments on: Transactional vs Confidence-based Trading Strategies

By: Mike Day

Mike Day — Tue, 31 May 2011 14:12:11 +0000

Could you explain how you calculate the standard deviation of one MA above/below another?

Thanks.

By: (Part 2) Time Machine Test – Non-parametric Statistical Filter « Quantum Financier

Tue, 11 May 2010 16:36:34 +0000

[...] Transactional vs Confidence-based Trading Strategies – [...]

By: Jeff

Jeff — Tue, 09 Jun 2009 16:58:07 +0000

Michael,

I agree with you after the following is accounted for:
1. first and foremost, you have to makes sure the variable and it’s relationship to E[r] is normal if you’re using a normal distribution, which I doubt it is.

2. you need to account for the dynamics of this relationship over time.

3. Of course the stability of the model
4. stability of the model components
5 All of this over sample data.

6. when you’re doing large scale trading, you have to come up with a (cost/benefit relationship to this type of scaling) vs. (the efficiency of transaction and information you’re giving the market)

I would say that most people do not account for many if not all of these and would fall victim to the “i’ll keep using these paramters or set of paramters till something breaks”

After all that you then have to realize that our models still aren’t perfect and that risk control should cover this.

my .02

By: Binary and Polynary Trading Strategies | Condor Options

Binary and Polynary Trading Strategies | Condor Options — Mon, 27 Apr 2009 22:20:29 +0000

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By: Eric D

Eric D — Thu, 02 Apr 2009 01:34:08 +0000

You can also have a hybrid type system, which I would describe as one that has some kind of transactional entry/exit signals but uses confidence (or expected value) to determine the size of the position.

One example is where the system says buy & you know (based on past results) that past buy signals with the same traits (Positive Slope, High Volatility & High Volume for example) as the current one generate a very large & consistent profit, so you increase your size accordingly. Conversely, a sell signal with Positive Slope & Low Volatility may get a smaller position size.

Breaking your systems down into the conditions present when the trade signal was generated can yield some very large benefits.

Eric

By: heywally

heywally — Wed, 01 Apr 2009 17:10:56 +0000

Speaking of confidence, I’m playing around with a ‘system’ that buys market weakness in small increments (up to a very conservative % total of my capital) and uses your ‘state’ daily aggregate prediction to help guide me on buying points (among other general indicators). Throwing good money after bad from time to time with no stops :) but managing risk via using indexes only and small position sizing on individual buys and in total. Selling on the pops back up.

I’m going to keep trading that way until ‘things get better’ (or death).

By: justin

justin — Wed, 01 Apr 2009 15:51:25 +0000

jkw- good point. That is also important.

I think instead of “transactional”, perhaps a more accurate term would be “binary”- either they’re in a “trade” mode or a “non-trade” mode.

I agree with you confidence based systems are more interesting, accurate, and the various other advantages. But they’re also much more difficult to develop and tweak- another one of the reasons why most systems are still “transactional”

By: marketsci

marketsci — Wed, 01 Apr 2009 14:31:08 +0000

Sure…give me a week or so. I need to do all of my end of month stuff this week. michael

By: dskills

dskills — Wed, 01 Apr 2009 14:12:42 +0000

Mike – can you comment on how to develop a confidence based system? I’m trying to come up with a simple example.

By: marketsci

marketsci — Wed, 01 Apr 2009 14:11:07 +0000

RE to dskills: in all three of the places where the concept is public (YK, Scotty, and the SOTM) the confidence is usually changing pretty drastically day to day even if the direction of the prediction isn’t. I think that’s important to the “increased sample size” argument.

RE: the right tool – you’re right, Excel wouldn’t be appropriate for a large db of stocks. I wrote a post a while ago about the tools I use (http://marketsci.wordpress.com/2009/01/06/faq-software-and-data/) and for this particular challenge I would definitely use Perl or some other programming language…just too customized I think to be done in any sort of off the shelf program.

Long time no talk – it was good to hear from you…
michael