System assessment (probabilities)

Discussions about the testing and simulation of mechanical trading systems using historical data and other methods. Trading Blox Customers should post Trading Blox specific questions in the Customer Support forum.
Post Reply
LeviF
Roundtable Knight
Roundtable Knight
Posts: 1436
Joined: Mon Dec 22, 2003 12:24 pm
Location: Des Moines, IA
Contact:
Contact LeviF

System assessment (probabilities)

Post by LeviF »

Using system backtest data, what is the math to use to calculate statistics such as probability of x% drawdown and/or y% return over n month period.
Top
sluggo
Roundtable Knight
Roundtable Knight
Posts: 2987
Joined: Fri Jun 11, 2004 2:50 pm

Post by sluggo »

Ralph Vince's 2007 book The Handbook of Portfolio Mathematics (link) recommends one method of estimating these probabilities. He calls his approach "The Leverage Space Model". Another approach would be to write a bare bones equity curve resampling program to do your own Monte Carlo studies. (The Monte Carlo packages built-in to testing programs like Wealth-Lab, PowerST, Mechanica, Trading Blox, & Traders Studio are not configurable to measure statistics over user-specified "n month period" as you desire. They only measure stats over the full period of the initial simulation. If you backtest the system over a 16 year period, they make Monte Carlo estimates of max drawdowns and returns for 192 months. Only.). Or for USD 37.00 you could buy ProSizer, an Excel add-in product that performs Monte Carlo studies, and see whether it does enough of what you want, to justify deciding not to write your own software. ProSizer is found at http://unicorn.us.com/trading/prosizer.html
Top
Post Reply

Return to “Testing and Simulation”