When to change
Posted: Wed Apr 07, 2004 3:02 am
Has anyone applied the Chi-Squared tests as mentioned Kaufman's "Smarter Trading"? He describes how one can setup and monitor expected vs actual results; then test the probability of those results happening by chance. In other words, would those results be in line with expected system characteristics.
Now, the "normal" trader conditioning we seek is to ride out a draw down. But I must admit to trading a few systems where the right thing to do was bail when the system exhibited characteristics outside the norm. In each case, the system continued to plummet far beyond where I bailed and would have seriously damaged the account.
My trading plan includes conditions for emergency bailout. If the system shows evidence of not behaving as in the past, I'll step down position sizing all the way to single contract. If the evidence of failure continues to mount, then I pull the plug. I will continue monitoring theoretical system performance on new data.
So far, I haven't faced a case of bringing a system back yet. Some folks look for an upturn in the equity curve, which is certainly encouraging. I would really want to understand how the system went out-of-bounds, and re-evaluate what I might expect to see in the future.
BTW: The systems were pattern based. One used intermarket relationships, and another traded coded price patterns. I've come to believe that pattern-based systems are statistically sensitive to structural market changes.
Cheers,
Kevin
Now, the "normal" trader conditioning we seek is to ride out a draw down. But I must admit to trading a few systems where the right thing to do was bail when the system exhibited characteristics outside the norm. In each case, the system continued to plummet far beyond where I bailed and would have seriously damaged the account.
My trading plan includes conditions for emergency bailout. If the system shows evidence of not behaving as in the past, I'll step down position sizing all the way to single contract. If the evidence of failure continues to mount, then I pull the plug. I will continue monitoring theoretical system performance on new data.
So far, I haven't faced a case of bringing a system back yet. Some folks look for an upturn in the equity curve, which is certainly encouraging. I would really want to understand how the system went out-of-bounds, and re-evaluate what I might expect to see in the future.
BTW: The systems were pattern based. One used intermarket relationships, and another traded coded price patterns. I've come to believe that pattern-based systems are statistically sensitive to structural market changes.
Cheers,
Kevin