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Why Use Specialized Software Like TSSB for Trading System Development?

While it’s possible to use general-purpose statistical modeling / data mining platform to develop and test predictive model based financial instrument trading systems, it is not efficient. There are many steps involved:

  1. Generate indicator and target variables
  2. Create model-building methods to produce a predictive model from a specified training set
  3. Apply this model to a test set of data
  4. Export predictions to a spreadsheet program
  5. Convert predictions to signals
  6. Compute financial performance statistics

This process is awkward, tedious, and its lack of versatility means there are limited applications. Trading system R&D is best done with software written specifically for this task.

A professional Trading System development platform must, at a minimum to the following:

  • Compute a wide variety of predefined indicators and targets, saving the user from the need to program them or purchase additional specialized software
  • Provide a scripting language allowing users to create variables not predefined, and modify existing variables
  • Permit development and testing of trading systems and signal filters for existing systems
  • Permit a range of architectures from simple to complex
  • Process daily and intra-day data
  • Process single or multiple markets, including the ability to compute cross-sectional (pooled) indicators
  • Export standard format databases to other programs and read externally produced databases
  • Provide a wide variety of modeling methods allowing users the best combination of power, speed, and resistance to over-fitting
  • Permit automated  indicator selection from a large list of candidates
  • Provide a wide and useful variety of optimization criteria (modeling objective functions) including financial performance
  • Permit development of regime-specific trading systems
    • Training and testing of trading systems that specialize in specific regimes such as high or low volatility, up or down trends, and more
  • Provide cross validation and walk-forward testing at a variety of granularities (day, month, year, etc.)
  • Report predictive accuracy and financial performance statistics individually for every fold
    • Training set (in-sample)
    • Out-of-sample data individually for every fold
    • Pooled out-of-sample results
  • Offer statistical significance testing for financial performance statistics where possible
  • Preserve predictions for examination within the program and for export to other programs
  • Allow ensembles (committees) and Oracles to be developed seamlessly
  • Generate graphics to study variables and their relationships
  • Permit development of long and short market neutral strategies

TSSB has all of these capabilities and many more critical in the development and testing and unbiased evaluation of predictive-model trading systems and signal filters.

There are numerous challenges in Trading System development:

  • Non-stationarity and shifts in regime
  • Curse of dimensionality
  • Low Signal/Noise ratio
  • Low information content of predictors
  • Ease of over-fitting
  • Poor Out-of-Sample generalization

TSSB has numerous features to cope with these issues and many others!

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There are two key pieces of information that every Trading System developer needs:
  1. Un-biased estimate of system performance
  2. Statistical significance of performance (p-value
    • The probability that a worthless trading system could have performed as well
  TSSB provides both!

  1. Unbiased performance estimates: based on walk-forward and cross-validation
  2. P-values generated by unique Monte-Carlo Permutation test
    • Application to Trading System Development pioneered by Hood River Research Inc.
    • Works for trading systems developed via guided (intelligent search such as step-wise, GP or GA)
    • Prior methods are only effective for exhaustive and/or random searches