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This first letter is a testimonial to back testing. |
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As a trader, I am convinced that back-tested mechanical trading systems can work. However, as a doctor I can tell you that one does develop a sixth sense of what's wrong and what to do about it even before all the tests are back. This puts you slightly ahead of the herdbe they bacteria or other traders, and a few minutes or a few hours can sometimes make the difference. In the scientific world, of course, one runs all the tests anyway because sometimes, you're just flat wrong. Still, my "doctor's intuition" is right about 80 percent of the time. Many mechanical trading systems cannot claim such a "percent profitable." I'm certain there are professional traders out there who have the same sort of sensitivity about the markets, and they clearly have an advantage over more mechanical traders such as myself. |
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Clint |
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This second letter is a response and rebuttal to the first letter. |
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In the October issue of our favorite magazine (Technical Analysis of Stocks and Commodities), there is an interview with James O'Shaughnessy. This interview will be of interest to those who have a view on the validity of back-testing as a method for developing trading strategies. The most interesting point made by Mr. O'Shaughnessy is that back-tested models work best in all fields of human endeavor, not just in trading. Such models, which he calls quantitative/actuarial models, consistently outperform nonback-tested models, which he calls clinical/intuitive models. This is as true for doctors attempting diagnoses as it is for handicappers picking horses at the track. It is as true for college administrators judging admissions candi- |
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