We explained last week the definition of Curve Fitting, and the conundrum it creates for potential systematic investors. Having the ability to determine if a system uses curve fitting is essential. But that can be difficult to determine. So how does one find a “Curve-fit Free” Trading System?
The secret to creating a non curve-fit system, is to change the curve. What does this mean? This is truly a simple idea, but as is often the case, the simplest ideas are usually the best ones. Changing the curve simply means changing the data the system is operating on, and changing the market you trade it on.
If a system was curve fit, whether intentionally or not, because it was tested and is now run on the same data – let’s use Soybeans as an example; then one way to make sure it’s not curve fit is to trade the system on a completely different market, like Crude Oil, instead of Soybeans.
There is simply no way for a system whose parameters were fit to the Soybean data curve to also be fit to the Crude Oil data curve. They are two completely different markets, in different sectors, reacting to different supply and demand dynamics.
One issue comes to light pretty quickly when actually putting this theory into practice, however; and that has to do with a system’s dollar based stops and profit targets, if they have any. It’s a lot easier to hit a $250 stop in the S&P market than it is in Soybeans, for example, with the market only having to move 1 point in the S&Ps, but 5 points in the Soybeans.
The natural inclination is to look at the dollar based stops being too close in the new market as a problem, and switch the stop level to be more in line with how the new market moves. But doing that is curve fitting again, by making the logic make sense on the data you intend to trade it on. It is extremely logical and perhaps even the right thing to do, but to ensure you are not trading a curve-fit system – you must leave the stop alone and trade the system “as-is” on the new market.
The end result of this dollar based stop issue is that it is better to look for systems with dynamic stop and target levels which are a pecentage or indicator driven, and not based on set dollar or point amounts specific to a certain market. With dynamic indicators, a system can be applied to any market without worry of the stop being hit on the next tick or a target within the bid/ask spread of a new market, and so on.
While the backtesting on many of these systems may not be the perfect 45 degree up angle chart you are used to seeing on many hypothetical reports, the performance numbers will represent a truly out of sample test and possibly give a much better picture of what to expect from the system in either market moving forward.
There are, of course, limitations to this approach, and the old saying “junk in, junk out” should dictate your actions, meaning if the system is not good to begin with, putting it on a different market is not apt to help out a lot.
IMPORTANT RISK DISCLOSURE
You should fully understand the risks associated with trading futures, options on futures, commodity trading systems and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options on futures, Forex and commodity trading systems involves substantial risk of loss and is not suitable for all investors. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
The returns for trading systems listed throughout this website are hypothetical in that they represent returns in a model account. The model account rises or falls by the average single contract profit and loss achieved by clients trading actual money pursuant to the listed system’s trading signals on the appropriate dates (client fills), or if no actual client profit or loss available – by the hypothetical single contract profit and loss of trades generated by the system’s trading signals on that day in real time (real-time) less slippage, or if no real time profit or loss available – by the hypothetical single contract profit and loss of trades generated by running the system logic backwards on backadjusted data (backadjusted).
The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The percentage returns reflect inclusion of commissions, fees, slippage, and the cost of the system. The monthly cost of the system is subtracted from the net profit/loss prior to calculating the percentage return.
If and when a trading system has an open trade, the returns are marked to market on a daily basis, using the backadjusted data available on the day the computer backtest was performed for backtested trades, and the closing price of the then front month contract for real time and client fill trades. For a trade which spans months, therefore, the gain or loss for the month ending with an open trade is the marked to market gain or loss (the month end price minus the entry price, and vice versa for short trades).
The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor’s participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
The information contained in the reports within this site is provided with the objective of “standarizing” trading systems account performance and is intended for informational purposes only. It should not be viewed as a solicitation for the referenced system or vendor. While the information and statistics within this website are believed to be complete and accurate, we cannot guarantee their completeness or accuracy. As past performance does not guarantee future results, these results may have no bearing on, and may not be indicative of, any individual returns realized through participation in this or any other investment.