Data Mining And Boredom

Last Updated on November 21, 2020 by Oddmund Groette

Here are more personal random thoughts on trading:

I saw a discussion on Twitter the other day about data mining and backtesting. Put short, one trader trades different strategies for different instruments/stocks. The other trader believes this is data mining. For example: To buy when RSI(3) is oversold might work on different stocks and not on others. If we trade this strategy on the stocks it works on, and not on the stocks it does not work on, is this data mining? Or should we only trade strategies that work on more or less on all S&P stocks? I believe the first is correct. Why should one strategy work on both APA and PG? These are completely different stocks from different sectors. To me, there is no logic to implement the same strategies in different sectors. I have tested thousands of strategies and all sectors behave differently. Even within sectors, you have to regroup the stocks.

I pick stocks to my strategies based on how they perform for this strategy over the last 3 years. If a stock does not show an upward sloping equity curve, I simply reject it from my strategy. Is this data mining? Perhaps it is. But this is the way I have done it over the last 12 years and it works really well for me. Have I just been lucky? I don’t think so. My trading is “out of sample” testing and my group of stocks performs better than any random group. I have tested this a lot of times. The key to successful trading is to look for patterns/attributes in stocks and trade what you find. Of course, it’s only logical that stocks have different patterns (at least to me). Sometimes you just happen to find a random pattern so there must be some kind of logic behind why this pattern should exist. Even better if you have some logic search BEFORE you test patterns.

I believe many will reject my methodology. That’s fine. I read a lot of blogs and see a whole lot of different theories. Usually, the blog post ends like “this is not recommended as a stand alone strategy”. I have picked up so many ideas from blogs and traded them, and still, the author thinks his strategy is not worthwhile as a tradeable strategy. The best thing is to trade a lot and trade with different strategies. Even some erratic equity curves contribute when having about 20 uncorrelated strategies! (I believe a lot of the blog authors don’t trade).

And some words on boredom and introversion: I believe trading should be boring. Perhaps contradictional, but the more boring the better you can do. Why? Trading only suits people with the following attitudes: patient, analytical and somewhat risk-averse. Yes, you have to take risks, but it needs to be balanced. All the traders I know that have lasted more than ten years have been somewhat introverted and very rational/analytical and not risk-takers. They don’t trade to get a rush, but to make money. They are happy to test strategies, but not keen on execution. When there is little prey in the markets, they simply wait out for better times. Of course, they have made money before and have the financial means to wait for many months.