

Genetic programming-evolved technical trading rules can outperform buy-and-hold (PDF) - henning
http://www.cs.ucl.ac.uk/staff/W.Yan/gp-evolved-technical-trading.pdf

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cowmoo
As a college undergrad (yes, I profess my status as a CS underling) doing a
senior thesis in GA, I have read some papers on this GA's applied to trading.
The dirty secret that these papers do not tell you is that: genetic algorithms
are quite stochastic, meaning that they can evolve quite varying quality of
technical trading rules, depending on the mood of the CS God during any
particular evolution trials.

And these papers' results, in the interest of the authors who wrote them, will
only tell you _the best_ trial run that they have gotten - but the trouble is:
out in the real world, judging your trading agent's performance is not by
running hundreds of GA trials on _historical_ stock data and publishing the
best results; but you have gotta put your money where your GA technical rules
tell you, whether the rules evolved are sub-optimal or not.

~~~
henning
I spent a few months trying to go from "wow!" numbers in papers to something
that I thought could be used for risking my own hard-earned money, and I
failed. I think it's tilting at windmills unless you have the resources of
Goldman Sachs or someone like that behind you.

I know for a fact that some investment banks use these techniques; they just
aren't using them to make a mechanical "trade/no-trade" decision.

What Joe Schmoe on the street reading these papers is interested in is the
possibility of lucrative personal trading. The papers ostensibly claim to
instead be examining market efficiency. Consequently reading these papers is
kind of disappointing. But, the reason I submitted the paper was its
unorthodox approach which differs from most of the other literature on
applying evolutionary computation to mechanical trading.

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maurycy
What you mean as "failed"? Even if you're bringing in stable (in sense of
Sharpe ratio) returns above the standard interest rates, you've already
succeed.

I don't think it makes sense to play with your money unless you're very rich.
Returns like 50% per year are quite unlikely in the longer run, yet very
risky. Instead, consider starting a fund.

~~~
henning
The profit-loss patterns weren't good enough to be ready for real-life
trading.

I'd be much more willing to tinker with it if I could do it with someone
else's money. The hedge fund motto is "other people's lives, other people's
money."

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icky
The problem here is that evolution optimizes for the conditions in which the
organism evolved.

~~~
henning
Correct. There can be permanent changes in market structure that make
historical data irrelevant. The term for this is regime change. That and model
risk.

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scw
Interesting, it is reasonable to suspect that many brokerage houses (with
billions invested in R&D and very intelligent individuals) are using the same
approaches to the problems with the added benefit of a human driver behind the
wheel. It seems to me that purely using automated approaches to investing (in
this case, GP market timing) will always be inferior to the insights of
intelligent investors coupled with intelligent computing, but that alone would
be a major shift from most investors current practices.

~~~
marvin
Actually, there was a link about this a little while back:
[http://www.bloomberg.com/apps/news?pid=20601109&sid=ayjI...](http://www.bloomberg.com/apps/news?pid=20601109&sid=ayjImYcoCiH8).

I am fascinated no end that a group of nerds is able to game the system to
such an astounding degree. In this century, it isn't by gaming the casino that
loads of cash can be made.

These guys run a hedge fund that is so successful it no longer accepts money
from the public, and only manages the assets of its own employees. Using
different secret strategies and to an extent human-supervised automatic
trading. Its annualized return since its birth in the eighties has been on the
order of 37%.

