Steve2 Elite    Posts: 750 Joined: 10/11/2012 Location: Annapolis, MD  User Profile | Keith, My thoughts on the seemingly random nature of OV simulations. The ending equity of any OV simulation is the result of a sequence of trades taken by the simulation. While it's tempting to think that seemingly small changes in a simulation's parameters (i.e., moving the start/end dates by one trading day) shouldn't have much effect on ending equity that's not the case because any change to parameters will cause a different sequence of trades to be generated/taken. With an account comprised of static portfolios, this randomness gets magnified because of account equity constraints. That is, it is frequently the case that you can't take all the trades that are generated on a given day because you don't have sufficient buying power. So even small changes to the sequence of generated trades can result in rather dramatic changes to the trades that are actually taken by the simulation. I spent many hours in the early days analyzing individual strategy performance within a portfolio and trying to do strategy replacement to improve performance. It never worked due to the random filtering introduced by buying power limitations. With dynamic portfolios, randomness is magnified once again because enabled strategies can change each period. So, seemingly small changes to account settings that impact EF calculations can result in different strategies being enabled which further impact on the trades generated/taken. So, I think the important thing to remember is that any simulation is just one data point. The higher the returns and the more consistent the returns are over the simulation period the better. But it's still just one data point and one needs to do sensitivity analyses on the simulation parameters including looking at rolling returns to really get a feel for how the account might perform. One of the things I've struggled with is how to verify that PW is working correctly. I'm not sure we have enough visibility into how things work to do this but it might be interesting, in your test, to look at one EF and see how the enabled strategies in the starting period changed over the first 28 days and whether that makes sense based on what the market was doing and the nature of the EF. Steve [Edited by Steve2 on 11/15/2014 11:45 AM] | |
