Ubzen System Development Process - page 5
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Ok, understood that, but should you also allow TimeToMAE realtive to the opentime to be nagative and positive? Positive tToMAE when you entered the trade to early and negative when you entered to late. Of course averaging the values might result in a perfect strategy so you have also to look at the StdDev of the tToMAE.
From what i see you are not allowing negative tToMAE's.
By in introducing the variables WatchBarsBeforeOpen and WatchBarsAfterClose i think i have overcome this issue. Note that this is still early work in progress. tToMAE and tToMFE are in minutes as precise as the used timeframe allow.
There are no analyses included yet, just raw data
I don't follow. Time of MAE, by definition, occurs after the time of position open. It cannot be negative.
After looked again at your charts, i think i know why we disagree on that.
My premise is that limiting the "to be analysed" period to the time between Open and Close is a good measurement for the actual prediction potential but for evaluating the entry and exit signals it is not good enough. That is the reason that with a breakout strategy and following your MAE definition the MAE would be very low at winning trades. But if we analyze also some bars before the open we will see that the entry is (of course) not the best possible.
As a picture say's more than 1000 words:
In this example with your definitions MAE/MFEE would be optimal, which when looking at a few bars more, they are not.
Maybe there is another definition for that what i mean and it is not MAE, but i hope you get my point.
After looked again at your charts, i think i know why we disagree on that.
My premise is that limiting the "to be analysed" period to the time between Open and Close is a good measurement for the actual prediction potential but for evaluating the entry and exit signals it is not good enough. That is the reason that with a breakout strategy and following your MAE definition the MAE would be very low at winning trades. But if we analyze also some bars before the open we will see that the entry is (of course) not the best possible.
As a picture say's more than 1000 words:
In this example with your definitions MAE/MFEE would be optimal, which when looking at a few bars more, they are not.
Maybe there is another definition for that what i mean and it is not MAE, but i hope you get my point.
Ah, that is not MAE/MFE...those terms have specific definitions and those definitions should be honored to avoid needless confusion. What you are addressing is the matter of identifying local maxima/minima and using the criterion of local max/min prices as they relate to maximizing profits. That must be done too, but that is not done with MAE/MFE analyses, as you have noted. (I discussed this in one the earlier posts in this thread, but it was probably buried in a wall of text and not readily identifiable)
You can adapt the MAE/MFE assessment criterion to look for more "opportune" entry/exit points but I will caution you on substituting the reasonings behind doing one as the being the reasoning for doing the other. This is the basis for optimizing the dozens of variations on the "Zig-Zag" strategy that exist out there.
Optimizing MAE/EMFE is not the same thing as what you are seeking to accomplish. You are seeking to maximize the profit per trade (rate of return) which is a noble goal and certainly provides data that can be used for fine-tuning entry and exit points of a strategy.
I personally do not seek strategies that maximize profit, I seek strategies that maximize RAROC, which requires you to have a basis for assessing risk. Risk of ruin provides this basis. Strategies that do not "come up short" by getting in late and exiting too early tend to be naturally filtered out of my downselection criterion, I do not need to seek them out directly, the process of selecting trade parameters that maximize RAROC will do this for you.
I understand where you guys are headed with your efforts, having been down this path myself, and I won't deter you from taking the journey as you really do need to experience it firsthand rather than taking my inputs on blind-faith.
Thanks Phillip, as always for your clear/concise comments. I'll just go in list format.
- I had same concern as Zzuegg, tho we never communicated about this. But you had the fore sight to see where we're going.
- If I drew a Slope-line with Umbrella-Handles (J-like) on the ends. Using your Mae. If I had 2 trades on the straight line. One at beginning of where the line began straight and ends in the middle. And the other began in the middle to the ending of the trend-line. Both of these trades would be perfect mae-mfe. Also their life spans would be Shorter. But the optimum would be the entire line, excluding the pig-tails at the ends of course. IMO.
- On Risk-Of-Ruin, I'll bet that Bj is ahead of the curve. I appreciate the article and it's simple formulas. It'll be interesting to see how the Bj and Investing guys contrast, if at all.
- On RAROC, my understanding of this is, it's trying to answer the same question as Sharpe Ratio. And In my mind, the question goes something like this. If I have a bank account returning 1% and trading returning 10% which is better? As assumption is Bank-Account= no-Risk and Trading=10% RoR. But this one doesn't stop there. It tries to take into account what we call in Bj Expenses. The Cost of the flight to Vegas... etc.
Since I believe, the point of this analysis is "Invest you money in the place which ensures the highest Yield vs Risk. Example, one may love the EUR-USD currency maybe because they live in Europe or America. But the system shows Better Return to Risk on GBP-JPY. (lets put Diversification aside) one should invest only in GBP-JPY.
I think most use Stock-Market Index and Bank-Accounts for these type of analysis. What do you use? -if you don't mind my asking. And can we use Jobs or if you're a Poker player, is it OK to allow the those into the equation as well?
Another big thank you from my side. I think i am following both paths, i currently don't see the statistically interesting point of MAE / MFE then beside that it will show is if it was more profitable to reverse the position.
Even if there is the possibility to overoptimize i might continue in trying to minimize timeToLocalMax and timeToLocalMin.
Some other thoughts about RoR would be intresting, expecially how to apply the result to the RAROC calculation.
By looking at the graph i would never come to the idea that we have a 1% chance of beeing below 40%..
Add: now i understand why you are suggesting to group trades and average them. This will result in a lower std due the smoothing. But is it also nearer to reality?
Some other thoughts about RoR would be intresting.
Allow me to give you my personal interpretation of Risk-of-Ruin from my experience in Bj.
- One can win 1-Million% but only lose 100% to be out of Business. Money-Management 101, if you keep betting a fixed percentage of whatever you have left, you'll never lose. True. In reality doesn't work because of broker minimum and human un-happiness at low returns.
- When betting fixed percentage. When you lose 2% and then win the next 2% you wager are you back to break-even. No. As such it takes more wins than (the losses that got you down) to break-even. This is the price we pay for making sure we don't go broke.
- No kind of Money-Management / Bet-Manipulation (aka progression) can turn a system which Loses on Fixed bets into a winner in the Long-run. The law of Mathematics will eventually get you back.
The way it's explained in Bj is if you have a 1% RoR that means 1 out of 100 people like you would not survive with that bankroll. Put another way, you have 1% chance of losing all your money if you keep risking that fixed amount. However, don't fall for the trap of thinking 10% risk of ruin is acceptable because somehow you have a good chance of not going broke.
I've had my simulators tell me on multiple occasions, with that capital, betting this manner, u only have a 5% RoR. But 4 hours into my play, I just lost 50% of my Bankroll. I'm like Wtf, in another 4-Hours I'll be broke, the Sims must have lied or I'll need to change something, or making lots of errors.
It's like most people think flipping a coin they have a 50-50 chance of head/tails. But I'll bet anyone to flip a coin 100 times and see if they get 50-50. Heck, I'll take that bet on even 10 flips. Put another way, if you wanted the Diamond marble in the machine holding 99 other Clay marbles, you know your chances is 1-100 of getting the Diamond or 1%. If it cost 1$ a try and you had $100 no problem.
However, if you're playing Russian Roulette with a 6-barrel pistol which spin one bullet for the Diamond if you don't go Bye-Bye. Even if the Revolver had 100 chambers, you'd be less optimistic about taking that risk. Yeah, there's a good chance your not gonna bye-bye on the first try but the bullet is not gonna wait til the 6th try to show up. Most of the people trying for this diamond would get hit somewhere around 3rd try.
1% ROR sounds good. But could be Hell in reality. Sometime it's easy to tell yourself heck. If I lose once, I'll just get some more money. What's the chances I hit 1% again lol. The truth is usually it's not the 1% that flips people out. It's the 50%, 25% draw-down, which makes people lose it. In Bj, it's referred to as the Point of Un-happiness. It's also referred to as Every-Day swings.
To conclude, the only thing that matters to me about RoR is, the lower the better. Having RoR 1% wouldn't make u feel any better if you lose. However, you can be sure to watch other people you know are running 10% Risk-of-Ruin seem Invincible.
RoR in your example means the Risk of loosing 100%?
RoR = Rate of Return
RoL = Risk of Loss
1%/50% RoL = 1% chance of losing 50% of account equity from any given point on the equity curve
1%/50% RoL = typical money management for professional money managers. Some try and go as tight as 1%/20% but the RoR at that point will usually be below 10% and most managers are seeking >10% CAGR.
Sharpe Ratio underestimates the portion of risk of loss that is attributable to variance (standard deviation). Sharpe is better than nothing, but it is incomplete as a metric of capturing risk.
Ok so my guidance where i got the formulas labelt it wrong.
Basically the strategy has a 1%/40% RoL, and a RoR of 160%. Of course regarding this example above.
I think i will recheck the calculations and forumlas
thank you a lot