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Advanced Trading Strategies

C o n t e n t s
  1. Upfront
  2. Featured
    • Pitfalls in Optimizing Statistical Trading Strategies (Part II)
  3. Announcements
    • Nasdaq forecaster
    • Optimizer
    • Black box trading
  4. Resources: product reviews, seminars, web sites
    • E-groups, webrings and Yahoo clubs
  5. Advertisements
  6. Preview: in the next issues
    • Nasdaq forecaster algorithm
  7. Subscribe / unsubscribe
U p f r o n t

Our team has been working hard to refine DataShaping statistical trading strategies. We will soon offer enhanced keys, for the same price. These keys rely on the latest technology described in our article below.

We are also working on automating order execution. Eventually, in collaboration with partner brokers, we will offer a product that performs fully automated trades every day. We are also in negotiation with top financial portals to provide Nasdaq forecasts online.

Meanwhile, our website is being improved every week. New products and services are added: check out our announcements section.

F e a t u r e d

Pitfalls in Optimizing Statistical Trading Strategies.

Part II: Improving long-term return on short-term strategies.

In this article, we describe how to backtest a short-term strategy to assess its long-term return distribution. We will focus on strategies that require frequent updates. They are also called adaptive strategies. We examine an undesirable long-term characteristic shared by many of these systems: long-term oscillations with zero return on average. We propose a solution that takes advantage of the periodic nature of the return function, to design a truly profitable system.

When a strategy relies on parameters requiring frequent updates, one has to design appropriate backtesting tools. From our previous article, we know that we should limit the number of parameters to six. We have also learned how to improve backtesting techniques, using robust statistical methods and constrained optimization. For the sake of simplicity, we assume that the system to be tested provides daily signals and needs monthly updates. The correct way to test such an adaptive system is to backtest it one month at a time, on historical data, as follows.


    For each month in the test period, do:

  • Step 1: Backtesting

    Collect the last six months worth of historical data prior the month of interest. Backtest the system on these six months to estimate the parameters of the model.

  • Step 2: Walk forward

    Apply the trading system with the parameters obtained in step 1 to the month of interest. Compute the daily gains.

The whole test period should be at least 18 months long. Thus we need to gather and process 24 months worth of historical data (18 months, plus 6 extra months for backtesting). Monthly returns obtained sequentially OUT OF SAMPLE (one month at a time) in step 2 should be recorded for further investigation. You are likely to observe the following patterns:
  • many months are performing very well
  • many months are performing very badly
  • on average the return is zero
  • good months are often followed by good months
  • bad months are often followed by bad months
We have now all the ingredients to build a long term reliable system, that we will call a metastrategy, since it is built on top of the original system. It works as follows:


    If last month return (as obtained in step 2) is positive, use strategy this month, otherwise use reverse strategy by swapping buy and sell prices.
This feature will be introduced in some of our selected trading keys, resulting in a lower but more consistent long-term return. A special symbol will be used to identify these high-tech keys.

A n n o u n c e m e n t s

  • Nasdaq forecaster
    It computes the chance that Nasdaq (or any other index or stock) will move up tomorrow, between open and close, by a given percentage. It is based on a non parametric model and constitutes our first type of universal key.

  • Optimizer
    The optimizer is a sophisticated program used to determine strategy parameters that meet specific criteria. Professional and institutional investors can contact us to obtain a customized version of the optimizer. Our phone number is 925-432-4104. Please ask for Vincent Granville, our Strategy Architect.

  • Automated Trades
    Our one-buy-one-sell daily system will be fully automated when "exact or at close" limit orders are available. We are currently investigating the feasibility with online and traditional brokers. If you offer broker services and would like to partner with us and provide this type of limit order, please contact us, at 925-432-4104. Ask for Vincent Granville, our Strategy Architect.

R e s o u r c e s

There are many thriving online communities focusing on stock trading, some of them being well maintained and spam-free. Besides popular message boards such as, there are Webrings (interesting if you own a financial web site), Egroups and Yahoo clubs. The easiest way to discover these resources is to use a search engine such as Google, and type in ad-hoc keywords in the search box. Start with . The first search result is Ed Borasky's egroup, one that I recommend. You can also check which clubs and egroups are most visited. Useful links: and

Note that my previous search asks Google to look for pages that contain both "egroup" in one word and "computational finance" in one word as well. It is a more efficient search than .

In the next issue of this newsletter, we will feature financial websites that compliment Data Shaping.

A d v e r t i s e m e n t s


    Daily stock picks for short term traders using Japanese Candlestick Patterns. Free Play of the Day picks; Glossary of candlestick terms and definitions; Traders Forum; Extensive list of stock picks based on daily patterns; 30 day free trial.

  • TradingAcademy

    Reduce your commissions substantially!!! Do not compromise, you can have it all! Let Online Trading Academy's relationships with top direct access brokerages help you get: Better commission prices, Better service on your account, Direct access platforms, and Bulk discount on commissions!

P r e v i e w

To appear in the next issues:

  • Nasdaq forecaster: algorithm
  • Trading strategies: pitfalls (III)
  • Trading keys: long term return
  • Best metrics to assess performance
To appear in the professional issue:
  • Updated list of stocks likely to outperform with our system
  • Brokers offering automated trading systems
S u b s c r i b i n g

To subscribe or unsubscribe, go to our web site and fill out the online form. You can also use this form to refer friends, business partners, colleagues or clients. This newsletter is sent occasionally, when we release new products or when our Research Department sends us an interesting article for publication.


Vincent Granville, Ph.D., Editor
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