Curve Fitting Mistakes

"The more you tune your system for best results,
the worse you will fare in your live trading."

Your test results will look better and better but your actual prospects will be getting worse and worse as the degree of curve fitting increases!

A definition of curve fitting is knowingly or unknowingly fitting rules to historic data in order to produce best results. Curve fitting is one of the worst crimes a systems trader can commit.

The more you tune your system to 'improve' results, the more you are becoming involved with situations that are unlikely to occur again.

Values giving best results are frequently isolated 'price spikes'. There is usually no reason to presume such an event represents the character of the market. Therefore there is no 'knowledge significance' or value in these spikes.

Experienced traders make certain that any parameter selection they make is not located on or near such price spikes. Their methods include ways of identifying and avoiding unrepresentative values.

If you are adjusting rules or parameters - ask yourself whether the intention is to apply the effects to all situations in all markets in a non-discriminating way and to all time periods.

The more your system rules apply generally and the fewer rules you have, the more you can be confident that you are not curve fitting.

Never tune your system for the best results you can find - always choose parameter values that appear to be among others that produce similar results. Avoid all exceptional values.

 

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Copyright David Bromley 2006
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