Curve Fitting - what is it?

In systems trading, curve fitting is when system rules and parameters are adjusted so that the best possible results are obtained from tests.

Systems trading is an interaction between what are known as system rules and market prices. In essence, this is all there is to commodity trading.

Given any list of prices, there is a maximum possible result that any particular set of rules can produce, allowing for the fact that nearly all systems have what are known as parameters and other variables that can be varied.

The method of choosing suitable parameter settings for trading is an expert process and systems traders pay a great deal of attention to this.

Systems testing using historical prices is an important activity to determine the capabilities of any system that is being evaluated and it is just as important to choose suitable parameter settings for this task as it is for live trading.

Good methods, common sense and judgement are necessary when deciding on parameter values to use and honesty comes into it as well.

The practice of varying parameter values in order to find the best results obtainable is what is known as curve fitting. Obviously, when doing this, you are probing to locate the best points. Modern computers which are very fast and permit automatic step testing enable traders to find these best settings without too much trouble.

There are other ways of curve fitting which are less obvious - having too many rules or filters - having different systems for different commodity groups are both methods of curve fitting. Any discrimination in making selections is likely to risk falling into the curve fit trap.

On the other hand, applying general rules and choosing generally average settings is the best way to avoid self deception and disappointment.

Choose ‘plateau values’ when evaluating parameter settings. That means choose values which are surrounded by others that give similar results and avoid ‘spikes’ that do not belong among neighbouring values.

 

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