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In the latest episode of Better System Trader, the guest, Dave Walton, made a compelling case arguing AGAINST some of the most popular backtesting strategies: Specifically, out-of-sample testing, walk-forward analysis, and Monte Carlo analysis. He states these approaches are a very poor indicator of future results. He advocates instead for something he calls System Parameter Permutation. Basically, it's a way to model many possible permutations of the same system but with a range of different parameter values for its rules (ie. entry and exit rules). Then, by looking at all of the possible outcomes, you can draw better conclusions on the probability of how your strategy will work in the future.
You can listen to the podcast and read a much more detailed explaination here:
http://bettersystemtrader.com/051-dave-walton/
So, as a community, what do all of you think? Does he make some valid points? Most importantly, is this something that can be done with QuantConnect? What about the Lean Engine? If not, are there other platforms that offer this type of analysis?
Jared Broad
I agree with that philosophy; we wrote a blog which used it here: https://www.quantconnect.com/blog/rotating-inversely-correlated-assets-nifty-usdinr/
Basically any "magic number" you use; make sure you do lots of variations on the number, and see how it impacts your results. At least this way you're reasonably confident that its not sensitive / curve fitting.
We have a parameter collection; maybe we could automatically perform 100x backtest and see how sensitive each parameter is on a similar sharpe ratio chart. We're still trying to figure out what the Optimization GUI will look like.
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James Smith
I think it's fairly clear that this raises the bar in terms of the quality of submissions to QC. The sophistication of the analysis and the approach go beyond most algorithms that are shared amongst trading communities and genuinely sets the template for an effective means to promote the on-going evolution of community driven quant trading strategies.
This algorithm represents a next-generation trading pattern super-set that is focussed on harnessing the abundance of available processing power for alpha discovery with genetic algorithms and machine learning techniques. This pattern should transfer to essentially any security and should be highly adaptable to different timescales.
@JayJayD: It might be worthwhile considering how it would be possible to extend and codify this model, so that for instance, additional indicators could be supported as well as multi-level chaining of logical operations.
It might also be helpful to outline the theoretical basis and suggested reading for this approach for anyone interested.
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Petter Hansson
@JayJayD: Can't view the PDF unfortunately, I will try accessing it again later.
@James Smith: The reason I didn't use the framework yet is simply because I'm using the cloud environment on QC - don't like dealing with data warehousing issues on my local machine. Are there any plans by QC to integrate your project with cloud environment?
I should say that curiously, I developed a genetic programming framework in Java prior to joining QC. However, I was analyzing daily bars and couldn't find much alpha in that case, I expect results to be much better with intraday data.
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JayJayD
James Smith thank you very much for your kind words, I truly appreciate it!
Respect to add more indicators, in the SetTradingRule method you can see that the number of indicators can be easily changed. In this implementation wasn’t a variable because of the difficulty of making variable the number of genes in the chromosome. But once you define your chromosome in the optimization.json in SharpNeat, you can change the number of indicators, and thus the operators.
Respect to making hierarchies of indicators, a quick way it can be implemented is through the ITechnicalIndicatorSignal implementation.
So, for example, the CrossingMovingAverages implementation send a True signal only when there is an actual crossing of MA's (as well the oscillators, this explain the low trades in the out-of-sample period), but you can easily change the GetSignal method to make more like a flag like this:
public bool GetSignal() { var signal = false; if (IsReady) { switch (_tradeRuleDirection) { case TradeRuleDirection.LongOnly: signal = Signal == CrossingMovingAveragesSignals.Bullish; break; case TradeRuleDirection.ShortOnly: signal = Signal == CrossingMovingAveragesSignals.Bearish; break; } } return signal; }In this example a long-only CrossingMovingAverages instance will send a True signal when the fast moving average is above the slow one.
In any case the ITechnicalIndicatorSignal implementation can be as complex as you need as long as it returns a signal after an event.
Petter Hansson, the document issue is fixed, thanks for report it.
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Patrick Star
Beautiful code, Jay! and really appreciate you sharing it with us!
One question though... (and this maybe because I haven't tested the code yet and the answer could be in it already) how do you optimize the parameters? do you adjust them by manual testing? or by analyzing the historical data? Thanks!
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JayJayD
Thank youPatrick Star !
The optimization is made by GeneticSharp, using the integrationJames Smith made.
Please note that the attached backtest is a hard coded realization of a strategy developed by the GA. As is explained in the text, the algorithm used in the optimization process cannot be replicated in the QC platform because of the use of DynamicExpresso.
The mechanics is as follows:
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James Smith
In terms of hierarchies of indicator signals, my understanding is it should be possible to allow, for instance, ITradingSignal to have a reference to a child ITradingSignal instance along with a contingent switch that allows recursion into the hierarchy of indicator signals. So for instance you could have:
totalSignal = (parentSignal = EMA(240) > α AND RSI(240) < β) AND (childSignal = EMA(60) < γ)
Structuring this using recursion means you simply need to decide whether to branch into a child before reusing all the same logic to build the descendant. I believe one of the main problems with this approach is the complexity of the resultant models.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Patrick Star
I can code almost anything but that's not the point. The real value is in creativity and ideas.. Looking at this project gives you a freash set of ideas and a different way of thinking. So thanks to both of you Jay and James. Keep it coming!
I am still slow in using LEAN locally but I will try to get it to work and learn GenericSharp and the integration part. I will ask more questions once I'm there :)
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
JayJayD
James Smith, now I understand what you mean and yes complexity can explode. I‘m pretty sure that the chromosome represetation of framework like that should be very challenging!
Patrick Star, I’ll happy to help!
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Tim Butler
Fantastic stuff JayJayD and James. Spent half of yesterday getting Visual Studio up and running with the Genetic Sharp implementation and it works fantastically.
I only wish I didn't have to go and buy data for all my ideas I want to test.
I would have to say this is the only time I've ever wanted more than 4 cores.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Tim Butler
One thing I'm itching to try is using different measures for fitness and seeing the results on out of sample data.
https://quantsketch.com/results_page.html#common-sense
Common Sense Ratio, Gain-to-Pain Ratio and Tail Ratio would be super interesting to play around with. I've peeked around the code and all I've managed to do so far is get lost. My C# is not strong enough.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Tim Butler
Alright, so I've managed to figure out how to add the three ratios and use them as fitness measures. Just needed a bit of effort.
I'm not sure of the best way to share the changes to Lean, but if anyone is interested we can probably figure something out.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Jared Broad
Tim Butler - We made all FX/CFD data free! :)
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
JayJayD
Hey Tim Butler!
I’m so glad you find this work interesting! James made such amazing work that the GA integrations is painless.
As Jared Broad pointed out, data is not a problem. But, as you noted, one of the main drawbacks of this project is the training requirements of computational power. Is the cost of evaluating the individuals in a very realistic environment (Lean).
In every GA problem, the fitness definition is single most important definition. The indicator you mention seems pretty interesting, I’d love to see them working! Maybe you can try making some kind of weighted average between the different indicators and use it as fitness.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Ryan Brickey
Hi,
When i try to run this in my live Oanda account, when i try to log in i get an error that the Oanda states are not the same. do you know where that needs to be corrected?
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Jared Broad
Ryan Brickey - Sounds like your oAuth got confused -- please write a quick email to support@quantconnect.com and we'll reset it for you.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
JayJayD
Hey Ryan Brickey, I wouldn’t put much expectation in this algorithm in particular, is just a proof of concept, the important thing here is the framework, not the resultant algorithm.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Erik Bengtson
Hi JayJay,
Awesome framework.
I was able to run it on amazon EC2, but it consumed too much resources. I will consider other cheaper alternatives.
I did some modifications to the original TradingStrategies, like including Bollinger Bands, so I share it.
I would like to implement multiple rules, and for each rule have hierarchical operators for indicators. I improved somehow the parameters for a single rule, but not able to configure the hierarchy of operators. Please share if you have any ideas on how to configure hierarchical operators.
Of course, the modified strategy is meant to be used for educational purposes.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
James Smith
Thanks Erik. I was impressed by JayJayD's work on genetic programming and have started to work on my own derivation of this here:
jameschch/GeneticTreeAlgorithm
I have made substantial changes to the structure, fixed bugs and added unit tests. I have also provided support for a logical tree of operators including OR, NOT, (x OR y) etc. I have also added support for ADX and now plan to integrate your Bollinger bands code.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
James Smith
Forgot to add; I've also improved performance significantly.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
JayJayD
Hey Erick,
I’m so glad you found this work interesting! I’ll check the BB implementation.
You nailed it respect to its main weakness, the expensiveness of the training. If I’d deploy something like this project I’d use DigitalOcean, the VM aren’t that fast but are cheap and reliable; and the interface takes the pain away from IaaS.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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