The Evaluation and Optimization of Trading Strategies E-Book

Robert Pardo

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 539

Veröffentlichungsjahr: 2011

Beschreibung

A newly expanded and updated edition of the trading classic, Design, Testing, and Optimization of Trading Systems Trading systems expert Robert Pardo is back, and in The Evaluation and Optimization of Trading Strategies, a thoroughly revised and updated edition of his classic text Design, Testing, and Optimization of Trading Systems, he reveals how he has perfected the programming and testing of trading systems using a successful battery of his own time-proven techniques. With this book, Pardo delivers important information to readers, from the design of workable trading strategies to measuring issues like profit and risk. Written in a straightforward and accessible style, this detailed guide presents traders with a way to develop and verify their trading strategy no matter what form they are currently using-stochastics, moving averages, chart patterns, RSI, or breakout methods. Whether a trader is seeking to enhance their profit or just getting started in testing, The Evaluation and Optimization of Trading Strategies offers practical instruction and expert advice on the development, evaluation, and application of winning mechanical trading systems.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Foreword

Preface

THERE AND BACK AGAIN

COMPUTING

THE INVESTMENT INDUSTRY

TRADING STRATEGY DEVELOPMENT TOOLS

THE RISE OF ADVANCED MATHEMATICAL CONCEPTS IN TRADING

TRADING MEETS HIGHER EDUCATION

Acknowledgments

Introduction

CHAPTER 1 - On Trading Strategies

WHY THIS BOOK WAS WRITTEN

WHO WILL BENEFIT FROM THIS BOOK?

THE GOALS OF THIS BOOK

THE LAY OF THE LAND

CHAPTER 2 - The Systematic Trading Edge

DISCRETIONARY TRADING

RAISING THE BAR

VERIFICATION

QUANTIFICATION

RISK AND REWARD

THE PERFORMANCE PROFILE

OBJECTIVITY

CONSISTENCY

EXTENSIBILITY

THE BENEFITS OF THE HISTORICAL SIMULATION

POSITIVE EXPECTANCY

THE LIKELIHOOD OF FUTURE PROFIT

THE PERFORMANCE PROFILE

PROPER CAPITALIZATION

A MEASURE OF REAL-TIME TRADING PERFORMANCE

THE BENEFITS OF OPTIMIZATION

THE BENEFITS OF THE WALK-FORWARD ANALYSIS

THE ADVANTAGES OF A THOROUGH UNDERSTANDING

CONFIDENCE

STRATEGY REFINEMENT

CHAPTER 3 - The Trading Strategy Development Process

TWO PHILOSOPHICAL APPROACHES TO STRATEGY DEVELOPMENT

AN OVERVIEW OF THE TRADING STRATEGY DESIGN PROCESS

CHAPTER 4 - The Strategy Development Platform

THE SCRIPTING LANGUAGE

DIAGNOSTICS

REPORTING

OPTIMIZATION

THE OBJECTIVE FUNCTION

SPEED

AUTOMATION

WALK-FORWARD ANALYSIS

PORTFOLIO ANALYSIS

IN CONCLUSION

CHAPTER 5 - The Elements of Strategy Design

THE THREE PRINCIPAL COMPONENTS OF A STRATEGY

AN OVERVIEW OF A TYPICAL TRADING STRATEGY

A TRADE EQUALS AN ENTRY AND AN EXIT

THE MANAGEMENT OF RISK

THE MANAGEMENT OF PROFIT

POSITION SIZING

ADVANCED STRATEGIES

SUMMARY

CHAPTER 6 - The Historical Simulation

THE ESSENTIAL REPORTS

THE IMPORTANCE OF ACCURACY

SOFTWARE LIMITATIONS

REALISTIC ASSUMPTIONS

LIMIT MOVES

MAJOR EVENTS AND DATES

HISTORICAL DATA

STOCK PRICES

CASH MARKETS

FUTURES MARKETS

THE CONTINUOUS CONTRACT

THE PERPETUAL CONTRACT

ADJUSTED CONTINUOUS CONTRACTS

THE SIZE OF THE TEST WINDOW

HOW MANY TRADES?

STABILITY

DEGREES OF FREEDOM

FREQUENCY OF TRADING

TYPES OF MARKETS

EFFICIENT MARKETS

THE LIFE CYCLE OF A TRADING STRATEGY

WINDOW SIZE AND MODEL LIFE

CHAPTER 7 - Formulation and Specification

FORMULATE THE TRADING STRATEGY

SPECIFICATION—TRANSLATE THE IDEA INTO A TESTABLE STRATEGY

MAKE A VAGUE IDEA PRECISE

CHAPTER 8 - Preliminary Testing

VERIFICATION OF CALCULATIONS AND TRADES

THEORETICAL EXPECTATIONS

PRELIMINARY PROFITABILITY

THE MULTIMARKET AND MULTIPERIOD TEST

CHAPTER 9 - Search and Judgment

SEARCH METHODS

ADVANCED SEARCH METHODS

GENERAL PROBLEMS WITH SEARCH METHODS

THE OBJECTIVE FUNCTION

A REVIEW OF A VARIETY OF EVALUATION METHODS

MULTIPLE EVALUATION TYPES

CHAPTER 10 - Optimization

OPTIMIZATION CONTRA OVERFITTING

A SIMPLE OPTIMIZATION

THE OPTIMIZATION FRAMEWORK

A MULTIMARKET AND MULTIPERIOD OPTIMIZATION

THE EVALUATION OF THE OPTIMIZATION

THE ROBUST TRADING STRATEGY

THE STATISTICALLY SIGNIFICANT OPTIMIZATION PROFILE

THE DISTRIBUTION OF THE OPTIMIZATION PROFILE

THE SHAPE OF THE OPTIMIZATION PROFILE

HOW DOES THE STRATEGY RESPOND TO OPTIMIZATION?

DOES THE STRATEGY DESERVE FURTHER DEVELOPMENT?

CHAPTER 11 - Walk-Forward Analysis

IS THE TRADING STRATEGY ROBUST?

ROBUSTNESS AND WALK-FORWARD EFFICIENCY

THE CURE FOR OVERFITTING

A MORE RELIABLE MEASURE OF RISK AND RETURN

ASSESSING THE IMPACT OF MARKET CHANGES

THE BEST PARAMETER SET FOR TRADING

THE THEORY OF RELEVANT DATA

SHIFTING MARKETS

THE VARIETIES OF MARKET CONDITIONS

THE WALK-FORWARD

THE ROLE OF THE WALK-FORWARD

SETTING UP A WALK-FORWARD

AN EXAMPLE OF A WALK-FORWARD TEST

THE WALK-FORWARD ANALYSIS

IS THE STRATEGY ROBUST?

WHAT RATE OF PROFIT SHOULD WE EXPECT?

WHAT IS THE RISK?

WALK-FORWARD ANALYSIS AND THE PORTFOLIO

CHAPTER 12 - The Evaluation of Performance

THE TRADING STRATEGY AS AN INVESTMENT

THE DIMENSION OF RISK

COMPARE THE STRATEGY TO THE ALTERNATIVES

MAXIMUM DRAWDOWN AND TRADING RISK

RISK ADJUSTED RETURN

REWARD TO RISK RATIO

MODEL EFFICIENCY

CONSISTENCY

PATTERNS OF PROFIT AND LOSS

CHAPTER 13 - The Many Faces of Overfitting

WHAT IS OVERFITTING?

THE ABUSE OF HINDSIGHT

THE CASE OF THE OVERFIT FORECASTING MODEL

THE CASE OF THE OVERFIT TRADING MODEL

THE SYMPTOMS OF AN OVERFIT TRADING MODEL

THE CAUSES OF OVERFITTING

CHAPTER 14 - Trading the Strategy

THE MENTAL ASPECTS OF TRADING

RETURN ON INVESTMENT

MAXIMUM RISK

REAL-TIME AND EVALUATION PERFORMANCE

COMPARING THE EVALUATION AND TRADE PROFILE

UNDERSTANDING THE TEST PROFILE

PERFORMANCE QUIRKS

IN CONCLUSION

Notes

Index

Additional Praise forThe Evaluation and Optimization of Trading Strategies

“The decisive step in system trading is the determination of the reliability and robustness of your system. This greatly expanded and very accessible new edition of Bob’s classic presents a thorough yet easy to apply and timetested methodology to accurately make this determination. This makes it possible to form a realistic idea of how your system should perform in the future and increases the likelihood of lasting real-time trading profit.”

—Murray Ruggerio, Vice President of Research and Development for TradersStudio; Contributing Editor Futures Magazine.

“Bob Pardo has re-written his own excellent book, and made it even better. It contains a basic step-by-step guide to building a trading system, along with an introduction to advanced system building concepts and tools. Simply avoiding the problems and errors Bob warns about can help lead to real time success. A must read for anyone interested in a systematic approach to trading.”

—Michael Tepper, Atlas Capital Management, Inc.

“A significant contribution that will present, explain, clarify, and illustrate Algo Trading strategies and how to properly test/optimize trading models, thoroughly researched and perceptive. It will give the reader very practical and seasoned insight into the world of Algo Trading. Bob Pardo brings a very lucid approach to a very esoteric subject; a welcome departure from most texts. It is both accessible and rigorous, which is quite rare.”

—Bruce J. Serra, Vice President, Institutional Sales, MF Global Inc.

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The Wiley Trading series features books by traders who have survived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

Copyright © 2008 by Robert Pardo. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Pardo, Robert, 1951–

p. cm.–(Wiley trading series)

Rev. ed. of: Design, testing, and optimization of trading systems. c1992.

Includes index.

ISBN 978-0-470-12801-5 (cloth)

1. Investments–Data processing. 2. Futures–Data processing. 3. Options (Finance)–Data processing. I. Pardo, Robert, 1951–Design, testing, and optimization of trading systems. II. Title.

HG4515.5.P37 2008

332.645–dc22

2007038106

Foreword

My relationship with Bob Pardo goes back to 1996 when he approached my firm, DUNN Capital Management, in search of trading capital for his XT99 system. After some extensive system evaluations, we entered into an agreement to help research, develop, and trade Bob’s XT99 for Bob, DUNN, and our clients. I am pleased to report that this arrangement has proved beneficial to all parties and that it is still going great guns. When Bob recently asked if I would write the foreword for this second edition I assured him that I would be more than delighted to do so.

Because of my scientific background and training we have always viewed system design and development as a diligent application of statistical analysis of the performance of trading models and of their test results. Accordingly, we were very pleased to find that many of these features were used in developing the XT99 model platform and that it was so amenable to further testing and fine-tuning.

When my colleagues and I had the opportunity to read the first edition of this work, we were particularly interested in Bob’s presentation of the virtues and benefits of using the walk-forward method to guide system development.

I am aware that many consider the first edition of this book to be a classic. Generally speaking, it is pretty difficult to improve upon a classic, but in this case it was necessary. As Bob outlines in his preface, to say that our world of computing, trading, and money management has changed since 1991 when the first edition of this book was published, would be a dramatic understatement. Given the vast changes that have occurred since the first edition, a new edition of Bob’s book addressing these matters is entirely in line. The good news here is that not only did Bob update the original material; he also reorganized it, explained the material with even greater clarity and insight and added some new insights that he has learned in the intervening years. Did he improve on a classic? You’ll have to be the judge of that yourself.

I have always been impressed with Bob’s technical toolbox and his innovative ideas. Bob’s focus, dedication, and originality as a researcher and trader are very apparent in this second edition. I think that serious system developers will find this second edition a very interesting and profitable read.

Enjoy it.

William A. Dunn, PhD

Chairman

DUNN Capital Management

Stuart, Florida

May 2007

Preface

THERE AND BACK AGAIN

The first edition of Design, Testing, and Optimization of Trading Systems (DTOTS, as I always think of it) was published in 1991. It would be an understatement to say that the world has changed dramatically in the 17 years between the 1991 edition and this one. Some would say the markets have changed also. I disagree.

The markets do what they always do: incorporate all of the changes in communication, technology, wealth, and trading styles into the instantaneous calculation of their fair value.

I have always considered the defining characteristic of markets to be their ability to adapt and alter themselves accordingly to the changing style of market participants.

In this introduction, we review the principal changes that have occurred during this time and their impact on the markets and trading. Many will seem obvious. Please bear with me in this walk down memory lane, however, for the sum total of these changes has altered the nature of trading and our industry in ways that directly reflect upon the current art of the design and evaluation of trading strategies.

“How?” you might ask, and that would be a very good question. Let me start by offering my reflections on that subject because it is highly relevant to the topic at hand.

The Trading System: From Rock Bottom to Rock Star

The first, and perhaps foremost, difference was that in the early 1990s, the argument that raged was about whether trading systems actually worked. For those who are relatively new to the industry, this might come as a bit of a shock. There is now such a widespread, and somewhat unquestioned, belief in the many virtues of algorithmic trading (AT) that it almost borders on religious belief.

As one who was rather instrumental in the acceptance of the benefits of algorithmic trading, I find both of these polar opposite beliefs somewhat troubling. I was trained in and always have been a fierce advocate of the scientific method and the empirical approach. I have always believed in the critical method.

In our business, the trader who does not apply these methods consistently, rigorously, and religiously along with a healthy dose of skepticism is a trader doomed to failure.

I believed then, and even more so now, that algorithmic trading, when performed correctly and based upon exhaustive research, is the most effective method for large-scale trading. Those of you who go on to read this book will find out in detail why I believe this to be so.

In short, the benefits of AT are many. Central, however, are the elimination of highly fallible human judgment, the precise quantification of risk and return and their application in risk and asset allocation, and the ability to trade a relatively unlimited number of markets. Add to this the current technological ability to enter algorithmically calculated trades electronically and without human intervention and we now have the best of all possible worlds: mathematically sound and objective trading signals entered at the speed of light without the (easy) possibility of human interference. Of course, there will be more on this later.