Most trading strategies are not tested rigorously enough
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Re: Most trading strategies are not tested rigorously enough
#2I don't know anybody that uses anything as weak as 2-sigma results in HFT, at least. Most of our valid signals have 20-50+ sigma.
Re: Most trading strategies are not tested rigorously enough
#3I don't know anybody that uses anything as weak as 2-sigma results in HFT, at least. Most of our valid signals have 20-50+ sigma.
20+ sigma is mostly kidding yourself about assumptions.
That said, the 2-sigma tests are for client-facing algos, where the goal isn't to build wealth for the client, it's to generate fees.
Re: Most trading strategies are not tested rigorously enough
#4I don't know anybody that uses anything as weak as 2-sigma results in HFT, at least. Most of our valid signals have 20-50+ sigma.
It doesn't look like the article is not about HFT in particular or even trading professionals in general. It's about academic articles, where the incentive is to publish a paper, not to make money. I recall (but cannot find) a paper that looked at the sort of strategies published by academics. Younger, non-tenured professors sometimes published results that were actually interesting, because they needed to get a job and built a reputation. Older professors don't do that. If they find an effect that's real, they take it to a hedge fund. There isn't too much incentive to publish a paper about something that will really make you money.
Re: Most trading strategies are not tested rigorously enough
#5I don't know anybody that uses anything as weak as 2-sigma results in HFT, at least. Most of our valid signals have 20-50+ sigma.
20+ sigma is mostly kidding yourself about assumptions. That said, the 2-sigma tests are for client-facing algos, where the goal isn't to build wealth for the client, it's to generate fees.
Agreed, errors are non-normal so 20+ sigma is practically false. But it's not too far off -- I've seen strategies that never have a down day and have daily sharpes of 2.5-3.0, and those setups will generally have incredibly high sigma values even after accounting for non-normality (and other assumptions).
Re: Most trading strategies are not tested rigorously enough
#6When trading real money in a real market, predictions based on historical data go out the window.
Historical data will never be able to truly simulate manipulation or sympathetic, symbiotic or parasitic relationships. Ever back-test a trading system that simulates a Market Maker letting low block go under the bid or dialing down the sensitivity of the bid vs. the ask? Speaking from experience.
That's why I'm developing an algorithmic trading system based on sympathetic, symbiotic and parasitic hidden connections.
Also Ref: Contagious Speculation and a Cure for Cancer: A Non-Event that Made Stock Prices Soar - http://www0.gsb.columbia.edu/whoswho/getpub.cfm?pub=1555
Re: Most trading strategies are not tested rigorously enough
#7Earlier quoted context omitted.
20+ sigma is mostly kidding yourself about assumptions. That said, the 2-sigma tests are for client-facing algos, where the goal isn't to build wealth for the client, it's to generate fees.
Agreed, errors are non-normal so 20+ sigma is practically false. But it's not too far off -- I've seen strategies that never have a down day and have daily sharpes of 2.5-3.0, and those setups will generally have incredibly high sigma values even after accounting for non-normality (and other assumptions).
Remember, strategies that 'never have a down day' are only one day away from having a down day...
...and there are plenty of strategies that had only a single down day, unfortunately that one down day wiping out the entire company :)
Re: Most trading strategies are not tested rigorously enough
#8Earlier quoted context omitted.
Agreed, errors are non-normal so 20+ sigma is practically false. But it's not too far off -- I've seen strategies that never have a down day and have daily sharpes of 2.5-3.0, and those setups will generally have incredibly high sigma values even after accounting for non-normality (and other assumptions).
Remember, strategies that 'never have a down day' are only one day away from having a down day... ...and there are plenty of strategies that had only a single down day, unfortunately that one down day wiping out the entire company :)
Sure, but most strategies have such small positions that even if the market went to 0 instantly at your maximum long position, you'd still lose less than a year's worth of PNL in that strategy. The more relevant risk of blowout is something like Knight happening, statistical black swan events are not really an issue (in HFT).
Re: Most trading strategies are not tested rigorously enough
#9From Wikipedia: "Some people claim that by recognizing chart patterns they are able to predict future stock prices and profit by this prediction; other people respond by quoting 'past performance is no guarantee of future results' and argue that chart patterns are merely illusions created by people's subconscious."
Re: Most trading strategies are not tested rigorously enough
#10I don't know anybody that uses anything as weak as 2-sigma results in HFT, at least. Most of our valid signals have 20-50+ sigma.
Since you seem pretty well acquainted with HFT, I'm curious about how much of a constraint capacity is? From what I understand the amount earned per trade is very small (this paper[1] suggests $1.45 per $10,000 traded). And since HFT is already a large fraction of the daily volume it seems that the natural way to increase profit (i.e. just trade more) isn't an option in most cases.