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OmniTrader Pro General Discussion
Achieving Balance in PortSim 50/50
6 replies, 652 viewings
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OmniTrader Professional Forum
OmniTrader Pro General Discussion
Achieving Balance in PortSim 50/50
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Last Activity 2/23/2025 4:01 AM 6 replies, 652 viewings |
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Frank Birch Veteran   Posts: 171 Joined: 3/25/2006 Location: UK  User Profile |
Enjoy. Introduction Portfolio simulation is a vital aspect of algorithmic trading and investment strategies. It involves testing and refining trading strategies to ensure they perform well in real-world scenarios. One of the key decisions in this process is determining the allocation between backtesting (BT) and out-of-sample (FT) data. While conventional wisdom often suggests allocations such as 70/30 or 80/20 in favor of BT data, I have found success with a different approach—using a 50/50 BT/FT allocation. This document explores my thoughts and process in adopting this unique allocation strategy. The Role of Back testing and Out-of-Sample Data Before delving into the 50/50 BT/FT allocation, it's essential to understand the purpose of back testing and out-of-sample data in portfolio simulation. Back testing (BT): BT data is used to develop and optimize a trading strategy. It involves testing a strategy on historical data to understand how it would have performed in the past. The goal is to refine and improve the strategy by learning from past market conditions. Out-of-Sample (FT): FT data is crucial for validating the trading strategy's performance on unseen data. It serves as a test of the strategy's robustness and ability to adapt to changing market conditions. An effective strategy should perform well in both BT and FT phases. Common BT/FT Allocations and Their Rationale Academic research and traditional practices often advocate for allocating a higher percentage of the data to BT. Ratios like 70/30 or 80/20 (BT/FT) are commonly recommended for several reasons: Optimization: A significant portion of BT data allows traders to fine-tune their strategy based on historical market behavior. This can help improve performance. Strategy Development: A substantial BT allocation permits the development of more complex strategies, which might not be practical with a limited amount of data. Risk Management: By focusing on historical data during the BT phase, traders can reduce the risk associated with implementing untested strategies in real-time markets. The Trade Frequency Dilemma One of the questions that arise with higher BT allocations is the potential for an excessive number of trades when the strategy is applied to real-time markets. If a strategy generates a large number of trades during the BT phase, it may not be feasible for actual implementation. My 50/50 BT/FT Approach My approach introduces an intriguing alternative to the conventional wisdom. I advocate for a 50/50 BT/FT allocation, aiming to strike a balance between the benefits of BT and FT while addressing the trade frequency concern. Advantages of the 50/50 BT/FT Approach Reducing Trade Frequency: A 50/50 BT/FT allocation mitigates the risk of generating an unrealistic number of trades during the BT phase. This can make the strategy more manageable and practical for real-world application. Balance Between Development and Validation: By evenly splitting the allocation, this approach ensures that the strategy is rigorously tested on unseen data while allowing for comprehensive strategy development. Practicality: The 50/50 approach makes it easier to assess how a strategy would perform in a real trading environment, without being overly reliant on historical data. Flexibility and Adaptability My approach highlights the importance of flexibility and adaptability in portfolio simulation and trading strategy development. There is no one-size-fits-all approach, and traders must tailor their strategies to align with their specific goals, risk tolerance, and market conditions. Conclusion In conclusion, the allocation between backtesting and out-of-sample data is a critical decision in portfolio simulation. While academic research often recommends higher allocations to BT data, I have found success with a 50/50 BT/FT approach, which balances strategy development and validation while addressing trade frequency concerns. This approach underscores the importance of adaptability and practicality in trading strategy development. Traders should evaluate their specific objectives and market conditions to determine the most suitable allocation for their portfolio simulation needs. In the dynamic world of financial markets, a willingness to think outside the box and adapt one's approach can be a valuable asset. My innovative 50/50 BT/FT allocation approach serves as a reminder that the world of trading is not strictly black and white. It is a world where adaptability, practicality, and balance are essential ingredients for success. As you navigate the complexities of portfolio simulation, consider how this unconventional approach may work for you and align with your unique trading goals and challenges. Regards Frank Birch | ||
| Buffalo Elite  Posts: 603 Joined: 7/11/2007 Location: Braintree, MA User Profile |
I am mulling this over and I must admit I am tending to agree. Thank you for putting this into my noggin. *IF* the BT allows a sufficient # of trades facilitating a solid decision making basis AND the FT # trades is within, say, 10-15% of the BT #trades I think this is a good idea | ||
| Frank Birch Veteran Posts: 171 Joined: 3/25/2006 Location: UK User Profile |
I hoped someone jumped on board as it really is a big advancement on testing! We take everything as is but in reality it isn't quite right. As traders we should think every day outside of the box as its our money on the line. I had 10 minutes so worked out an equation for said results for all to work on. Regards Frank Birch [Edited by Frank Birch on 11/10/2023 2:23 PM]  Attached file : BT FT.png (28KB - 295 downloads) | ||
| Frank Birch Veteran Posts: 171 Joined: 3/25/2006 Location: UK User Profile |
here's a screen shot of a performance report just look at the stats from BT/FT from No of trades to PPT to ANP. This goes for solid systems even down to AI. Regards Frank Birch [Edited by Frank Birch on 11/10/2023 3:01 PM] Attached file : Performance report.png (289KB - 280 downloads) | ||
| Buffalo Elite Posts: 603 Joined: 7/11/2007 Location: Braintree, MA User Profile |
Nice trade results! One of the things I look for is consistency - BT v FT # trades, HR, ANP, Avg bars in trade, and PPT for example. Yours meets all of them in spades. Next check would be a port sim, esp looking at DDs. For the equation - some questions. 1) It starts with an "If" so **If* FT#trades/BT#trades is >= the first and <= the second THEN...??? It's a solid system? The test is good? 2) Define percent_range for me Thanks! [Edited by Buffalo on 11/11/2023 2:05 PM] | ||
| Frank Birch Veteran Posts: 171 Joined: 3/25/2006 Location: UK User Profile |
I've further gone into detail on my criteria for accepting if the results and simplified it with numbers. Normally i do this on paper but here it goes how to explain what you need to see in your results. 1/ Consistency in Trades (90% and 110%) 2/Minimum Hit Rate Requirement (70%) 3/Minimum Number of Trades (100) 4/Maximum Drawdown Constraint (30%) These are the same for BT/FT. If you take a look at the performance below they are very close on all counts on BT/FT. this then shows me its a very solid strategy to then pursue further using the Port Sim. i have just done a larger data set to show you guys consistency across both BT/FT with the performance report using 2 years BT / and 2 years FT. ive taken the APN out of the formula as id rather use the port sim. Regards Frank Birch [Edited by Frank Birch on 11/12/2023 3:35 AM] Attached file : Formula.png (29KB - 242 downloads) Attached file : Peformance Report.png (206KB - 229 downloads) | ||
| Frank Birch Veteran Posts: 171 Joined: 3/25/2006 Location: UK User Profile |
Introduction to Trading Realities In the labyrinthine world of trading, many are drawn to the allure of its perceived promises — wealth, independence, and success. It's a world where questions about the bottom line are as common as the ticks of a stock ticker. Yet, the unvarnished truth is that trading is not a golden ticket but a rigorous discipline that demands realism and resilience. True success in trading doesn't echo in the hollow ring of a cash register but resonates in the quiet confidence of a well-executed strategy. The Potential of Any Chart, Any Timeframe To the uninitiated, a chart is a mere jumble of lines and numbers. But to the seasoned trader, it is a canvas, on which, with the right strokes, a livelihood can be etched. Whether it's the brisk pace of a day trader or the measured analysis of a long-term investor, any chart and any timeframe can be the cornerstone of a sustainable strategy. The caveat, however, is that it's not merely the potential to make money that matters, but the understanding that it requires more than just a cursory glance — it demands an in-depth study, a mastery that comes only with experience and persistence. Evolution to Mechanical Trading Ten years ago, the trading community stood at a crossroads, faced with a question that would pivot its very approach — why not automate? The answer was a foray into mechanical trading, a paradigm shift that proposed a hands-off approach, letting algorithms make the decisions. The success of this approach did not come overnight. It was a result of rigorous backtesting, of learning to trust in the mechanical over the emotional, and of the gradual but firm adoption of a system that trades with unyielding precision. Challenges Along the Way Every trader knows that the path to success is fraught with challenges. For those who embarked on the journey of mechanical trading, the road was no less bumpy. Obstacles were omnipresent, but each one served as a crucible for refining strategies. The move towards a mechanical system was not just a change in trading practice but a transformative experience that required overcoming skepticism, technical limitations, and the inertia of conventional wisdom. Coding and Continuous Learning The core of mechanical trading is coding — a language that translates market philosophy into executable actions. The process of coding trading algorithms is akin to planting a garden; it requires patience, care, and above all, an understanding that not all seeds will bear fruit. Yet, it is within this digital soil that ideas are tested, and learning is accrued. The knowledge gained through coding is not just technical; it encompasses the market's psychology, its patterns, and its unpredictable nature. The Value of Stubbornness and Persistence In trading, as in life, stubbornness is often seen as a vice. But in the realm of mechanical trading, it is a virtue — a steadfastness that fuels the relentless pursuit of a winning strategy. It's a tenacity that says no single market, no single challenge can outlast the determination of a trader who refuses to accept defeat. This stubbornness is the backbone of a philosophy that values perseverance, knowing that in the algorithmic trenches, victory is often just one more iteration away. Mechanical Trading: Beyond the Financials Contrary to popular belief, mechanical trading isn't a mere pursuit of profit. It's a quest for balance — the equilibrium between the backtesting (BT) of strategies rooted in historical data and the forward testing (FT) that looks to the future. It's a harmony that understands that money is the outcome, not the objective; that true wealth in trading is found in the balance of risk and strategy. Incorporating Risk Management In trading, greed can be a siren's call, luring unwary traders onto the rocks of risk. The seasoned trader, however, hears a different tune — one that speaks of risk management as the cornerstone of sustainable trading. It's a tune that sings of risk not as an adversary but as a companion on the journey, one that, when respected, can lead to the ultimate reward. Equity Report: Risk Becomes Reward At the heart of this balance is the equity report — a testament to a trader's journey. It is not just a ledger of wins and losses but a narrative that tells of risk taken, managed, and ultimately transformed into reward. It's a document that serves as a beacon to other traders, signaling that the path to profitability is paved with prudence, not bravado. Conclusion: The Priceless Value of Shared Knowledge The journey of a trader is solitary, but the knowledge gained need not be hoarded. Sharing insights, strategies, and experiences is the hallmark of a community that grows stronger with each shared challenge and triumph. In the end, the true. What does this equity report tell you trading the USA biggest futures by volume on a 15 minute time frame?? everything! Every thing we build includes Slips ands Comms into the equation please do not forget this as by not including slips and comms into the equation hyper inflates results. In Trading and testing from the BT to FT its all about balance! Regards Frank Birch [Edited by Frank Birch on 11/26/2023 5:31 AM] Attached file : FT BT 15 minute furtues.png (411KB - 188 downloads) |
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