Beyond Technical Analysis: How to Develop and Implement a Winning Trading System, 2nd Edition

Chapter

Data Scrambling

There are never enough data of the kind you want.

Introduction

Our focus continues on understanding how our system will do in the future. In this chapter we introduce a new method to generate synthetic data that can produce unlimited amounts of data for system testing. The new method, called data scrambling, will help you overcome the restrictions imposed by the relatively small amount of data on futures markets. Data scrambling can create the new price ranges and new price patterns necessary to test your system under the widest possible range of market activity. This is true out-of-sample testing. We explain this procedure in detail using a spreadsheet and S&P-500 data. We then use a 7-year long Swiss franc continuous contract to generate 56 years of synthetic data. We then test a volatility system on the synthetic data so you can appreciate the advantages of such testing.

What You Really Want To Know about Your System

What you really want to know about your trading system is how it will do in the future. Ideally, you want to know what the profits and the drawdowns may be. Since you cannot foresee the future, a good option is to test your systems on many data sets that “simulate” future market action. You can then simply average the results to get reasonable estimates of future profits and drawdowns. We emphasize, however, that it is difficult to get precise ...