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.
