Steve Mayo![]() Legend ![]() ![]() ![]() ![]() Posts: 414 Joined: 10/11/2012 Location: Austin, TX ![]() | Adding to Mark's nice explanation... Hard Switching was the technique we used in our mock-up of PortSwitcher....basically to sell all open trades in PortA and buy all open trades in PortB as of a certain date. In writing the code to implement it, Nirvana split it up into a "hard sell" and a "hard buy." So, now you can decide to let your open trades in Strat/PortA continue to a normal close AND/OR decide whether you want to jump into the in-play trades for Strat/PortB or wait until that strat/port fires new trades. Neat! However, with the hard switching (e.g, both boxes checked) that we (Mark Holstius and Steve Mayo) used in our mock-up, we could know (almost) exactly what the result would be -- basically, we were just stitching together pieces of the equity curves. But now, with 'soft' switching (one or both boxes UNchecked -- or as the current system is implement pending those checkboxes -- it's impossible to predict what the result will be without actually running it through the simulator (i.e., recalculating trade by trade, day by day). OV is all about trying to stay fully invested and what happens at the 'equity ceiling' to accomplish that. By electing to NOT close open trades (the current system without the checkbox), you tie up equity in Strat/PortA that may or may-not have performed better if it could have been employed by Strat/PortB. Likewise, by NOT immediately entering the in-play trades of Strat/PortB, you miss out on those trades (which may or may-not have improved/worsened your return). In other words, you don't know what will happen until OV runs it through the simulator. We added 'soft switching' because there was concerns that hard switching could mean closing out trades at a loss that might have later turned around and because you might end up getting into trades after they had made their initial move. That's absolutely true -- but comes from thinking like a trader. If, instead, you think of OV as a mutual fund, then hard switching is more logical. You buy-in or sell-out of a mutual fund at the daily closing price with no regard to what stocks the manager bought or sold that day based on that fund's performance (read equity curve), based on what that fund has done in the past and what you expect it to do in the future. With soft switching, we introduce a new set of conditions that make the past and future unpredictable, at least over the time that it takes the soft changeover to equilibrate (and then compounding that unpredictable loss/gain over time). Granted, everything in technical analysis is based on backtested simulation -- soft switching is no different -- but as a scientist, I have to caution that it is introducing a new variable that can dramatically change the "characteristics" of the system. Hard switching does too, but it's more directly a function of the individual strats/ports used in the composite; soft switching is not the sum of the parts but rather a whole new creature, at least during the equilibration period. Using conditions and soft-switching at the strat level means the "switching" condition gets applied daily so the system may never really equilibrate, of course, depending on how frequently the condition takes effect. Bottom line, this is a brave new and exciting world. We need to do a lot of testing to better understand it. |