When evaluating any trading system, hold it to these standards:
- It is profitable in a wide variety of market groups
- It is not curve-fit or over optimized.
- It is profitable across a range of parameters.
- Its logic and rules must be fully disclosed with no black box aspects.
More on Curve Fitting
- Trend Following is not a curve-fit. Curve-fit systems customize the trading rules differently for each market you trade, producing unrealistic results. Trend Following rules are the same for each market.
- Computer technology can be easily used to over-optimize a trading system and produce something that looks good. By testing thousands of possibilities, you could create a system that works. However, trying to produce a magical or perfect system falls apart in the real world.
- Trend Following parameters or rules work across a range of values. System parameters that work over a range of values are robust. If the parameters of a system are slightly changed and the performance adjusts drastically, beware. For example, if a system works great at 20, but does not work at 19 or 21 you have a system with poor robustness. On the other hand, if your system parameter is 50 and it also works at 40 or 60, your system is much more robust (and reliable).
- Traders often only focus on future profits when looking at a system. The key, however, is risk control (or money management). If you control your risk and let your profits run, you position yourself to make bigger money throughout the long term.
- A good system with robust and adaptive parameters must not require re-optimization. Trend Following uses indicators and parameters that adapt to changing market conditions.
NOTE: If you want to learn about trend following trading in general there is one definitive text: the bestselling classic "Trend Following: How Great Traders Make Millions in Up or Down Markets" by Michael Covel. If you want to learn about the most famous group of trained trend following traders, the Turtles and their teacher Richard Dennis, "The Complete TurtleTrader" by Michael Covel is the only complete biography (with all of the Turtle rules) available. If you want to learn trend following techniques and systems through advanced home study and or seminars click here.
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