Should a system work across all stocks?

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Old Nov 20, 2006, 7:43am   #1
 
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Should a system work across all stocks?

I've been playing with metastock for a few months now - and - having a slight knack for programming - haven't found it too difficult to come up with a handful of systems that appear to have some success.

I'm well aware of the pitfalls of backtesting, but: should a system that works well on a few stocks, be thrown out just because they don't work on all stocks and therefore would lose money if applied to the market as a whole?

If a system works on stocks A, B and C, but not very well on X, Y and Z be used to trade just A, B and C? or am I kidding myself?

any thoughts appreciated
Oscar74
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Old Nov 20, 2006, 8:11am   #2
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a good trading system will work on all financial instruments, not just stocks. The more a trader has to narrow down the number of markets he or she thinks the system applies to, the weaker the system
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Old Nov 20, 2006, 8:29am   #3
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Originally Posted by Pippppin
a good trading system will work on all financial instruments, not just stocks. The more a trader has to narrow down the number of markets he or she thinks the system applies to, the weaker the system
Why should this be so ? I very much doubt it. For example why should currency futures trade the same as stock index futures ? In fact they do not.

A successfull system for trading stock index futures may use a number of inputs that are not even available in the forex market - eg DOM, things like VIX, TRIN, TICK, BID/ASK ratios, perhaps the behaviour of related options etc etc.

Last edited by dcraig1; Nov 20, 2006 at 8:34am.
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Old Nov 20, 2006, 8:51am   #4
 
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Quote:
Originally Posted by oscar74
If a system works on stocks A, B and C, but not very well on X, Y and Z be used to trade just A, B and C? or am I kidding myself?
It depends what underlying behaviour and/or inter-stock or inter-market correlations the system has identified. Maybe A/B/C are seasonal, or influenced by a commodity price, or are tracked by long-only funds, or are disproportionately program traded, and X/Y/Z aren't. Or maybe they reacted to 'important' S/R in your testing period that X/Y/Z lacked. Or maybe you've just over-fitted your system to A/B/C. Whatever, if it works in backtesting and out-of-sample testing and, optionally, forward testing, then it works, regardless of what else it works on.
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Old Nov 20, 2006, 9:00am   #5
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If a system works on A but not on X can you identify, in generic terms, and without the benefit of hindsight which markets it works in and which it doesn't? If not, what is to stop A trading in the future like X did in the past?

I think it is best to assume that the system's future performance will be, at best, its average performance accross a broad selection of stocks rather than match the best ones.

Suppose you took 100 coins and tested them by tossing each 10 times. If one coin came up heads 8 times out of 10 in that test would you expect it to reproduce that performance in the future?

Good luck in your quest

Gareth
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Old Nov 20, 2006, 9:52am   #6
 
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yes, as long as the free float is larger enuf

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Old Nov 20, 2006, 9:59am   #7
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dcraig1

currencies, stocks and commodities exhibit the same patterns of supply and demand. It has nothing to do with "inputs"
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