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Forums>StrategyQuant>General Discussion>What is the connection between in sample and out of sample

  • #237775 |
    Customer
    11 Posts

    Does it matter whether I change the proportion or not?

    Is the strategy built on IN SAMPLE or IS+OOS?

    #237777
    Customer
    45 Posts

    Hi Jerry, the strategies are built on IN SAMPLE. So the IS should be also bigger than OOS.

    DP

    #237781
    Customer
    790 Posts

    i disagree with this simple formula – IS should be bigger than OOS. by my opinion is better to build strategies on a little of data, make choices through the whole data behavior (high volatility, low volatily, chop) and generate only on few months (years) and make everything else as OOS

    by this way you will get more different strs, which can be ready for most of states of a market

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    #237800
    Ilya
    Customer
    99 Posts

    I agree with hankeys, the smaller your IS is, the less overfit the strategy is, and the more strategies you can generate in a shorter time. Filter according to large data, generate on small.

     

     

    #237807
    Customer
    45 Posts

    i disagree with this simple formula – IS should be bigger than OOS. by my opinion is better to build strategies on a little of data, make choices through the whole data behavior (high volatility, low volatily, chop) and generate only on few months (years) and make everything else as OOS by this way you will get more different strs, which can be ready for most of states of a market

    I agree with hankeys, the smaller your IS is, the less overfit the strategy is, and the more strategies you can generate in a shorter time. Filter according to large data, generate on small.

    Thanks to you both, thats a good point. However how is the behaviour of SQX if we search for strategies using the random build method? SQX makes no difference between IS and OOS?

    DP

    #237814
    Customer
    11 Posts

    Thank you guys

    Now I know it’s written in the “user’s guide”:In Sample – it is used during genetic evolution;Out of Sample – this part of the data is used to verify.

    When I set IS to 0 then no evolution happens, fitness stays at 0.06. I guess evolution is about improving strategy’s fitness value

    I’m not sure if it’s  theoretically right to generate strategies whith small IS and big OOS.

    I think it makes no difference that overfitting happens on IS or OOS.

    Isn’t backtesting about overfitting? History will repeat itself this sort of thing?

     

    #237815
    Ilya
    Customer
    99 Posts

    I’ll give you my take on things:

    – First and foremost, indeed genetic evolution is about improving a strategy’s fitness level, by trying to slightly change its parameters on each run, and see whether it improved or not.

    – Generation of the strategy (“training of the model”) happens on the In sample period, regardless of whether you use genetic or random evolution.

    – Now, using out of sample periods makes sense in both types of generation, I’ll explain why.

    Genetic evolution

    This is the obvious one, once you “recycle” the same strategy with fine tuning and permutations until it satisfies your filters (or fitness minimum), this strategy is most probably overfit on that set of data. Therefore it makes sense to run the strategy one time “out of the box” on a previously unknown set of data, to make sure it functions well without being perfectly fitted on it. thereby reducing chance of overfitting. This can be done using the OOS slider during building process.

    – Essentially, here a single strategy may run 200 times on the IS data until it satisfies your needs, then only 1 time on OOS data to make sure it satisfies your performance requirements, so you can see the advantage of that OOS period and how much you reduce chances of overfitting.

    Random Evolution

    Here, unlike genetic evo, a single strategy runs only 1 time on IS data, and then 1 time on OS data, and then your filters are checked. So “to the naked eye” it seems there is no difference between IS and OOS, since before landing in your databank it sweeps through the whole period combined.

    BUT, firstly, don’t forget that if a strategy doesn’t satisfy your IS needs, it will not go on to be tested on the OOS (Unless your filters are only related to the whole data set, and then the above is true, it basically means the whole data is IS, whether you divide it or not).

    Here, because in Random gen we get a lower percentage of strategies to pass to the databank (since we just randomly throw in a mix of parameters and see if it works), it is its own kind of overfitting, even if we don’t recycle it as on genetic evo, since we just switch strategies on hyper-drive, until it “nicely sits” on our data set. So here what makes sense for us to do is to use an unseen set of data for OOS, which isn’t part of the generation process, for example the last 6 months or a year, which will be only revealed to the strategy in the retester. That way we have more confidence that our randomly created strategy, didn’t “accidentally” perfectly fall on our building data set.

     

    And that’s only the tip of the iceberg to avoid overfitting, robustness testing and walk-forward are the real MVPs of avoiding it. But OOS periods are, to me, an essential part of the building and retesting process and I always reserve one OOS period at least for building, and another more recent one totally unseen, to be run on the retester.

    Cheers

     

     

     

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