Discussing the article: "Estimate future performance with confidence intervals"
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Check out the new article: Estimate future performance with confidence intervals.
In this article we delve into the application of boostrapping techniques as a means to estimate the future performance of an automated strategy.
When we test a candidate trading system, we naturally end up with a collection of various performance metrics. This data will intuitively give us an indication of the profit potential of the system,but this intuition may not be enough. A strategy that produced plenty profit in testing can garner less than stellar returns when traded live. Is there some way of getting a better idea, of whether performance observed during testing will continue at the same level? If it does not, how bad will the performance get?
This is where standard statistical methods could help. It should be noted that the techniques we will discuss are not meant to be accurate in their estimations, they will never be. What they do is provide methods to identify strategies with a high probability of producing significant or acceptable profit.
I have seen many who use raw Sharpe Ratio figures to make probability based assumptions of future performance. This is dangerous, remember, that past performance is not an indication of future profit. Financial markets are not to be trifled with. Price charts gyrate this way and that, often for unknown reasons. What we want to do is calculate proper probability based performance projections that we can apply in our decision making processes.
A confidence interval refers to the probability that a certain statistic of a collection of data or population will lie within some range for a proportion of time. They measure the degree of certainty by computing the probability that the levels calculated will contain the true statistic that is being estimated. Statisticians usually use confidence levels of 90% , up to 99%. These intervals can be calculated using various methods. In this article we will concentrate on some common boostrap techniques.
Author: Francis Dube