Most Forex trading systems and I would say about 99% lose money and one way to spot the good trading systems from the losing majority is – to look for curve fitting. If you don’t know what it is then read on, as it’s an essential part of your forex education.
Curve fitting involves bending a trading systems rules in hindsight, to fit the data.
In reality what happens is a trader cannot get his forex trading system to work on the parameters or rules he has set – so he keeps adding parameters or adjusting the rules until he has a profit.
However the same market price sequence he tested it on, is never likely to repeat itself EXACLTY again.
The fact the system has been bent to fit the data, means that it is likely to lose in real time forex trading.
A trader I know compared this to shooting blind folded at a barn door and then afterwards, drawing a chalk circle around each one, to make it look like a perfect bulls-eye!
There are those who curve fit on purpose and know it doesn’t work and this involves the vast group of vendors selling trading systems. They don’t care if it works or not they just want to sell systems! They simply put this disclaimer on to cover themselves:
“CFTC RULE 4.41 – Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown”.
They know the system won’t make money they just want to sell systems with hyped advertising copy and the novice trader who doesn’t really understand he is being duped falls for it and loses.
The other group are:
The traders who are trying to devise a forex trading system for themselves and they do it unintentionally. They curve fit without realizing what they are doing and why it will fail
How To Spot and Avoid Curve Fitted Systems
So how do you spot a curve fitted system and what are some rules to stop you doing it in your own?
Here are some guidelines:
Curve fitted systems tend to have lots of rules and parameters, have different rules for different markets and different trading conditions.
This means the system is obviously bent to fit the data.
A non curve fitted forex trading system, will use only a few rules or parameters which are the same for all markets and conditions.
The simpler the system, the less likely it is to be curve fitted.
This goes with the fact that – simple systems work best, are the most profitable and this has always been true.
Today the power of computer software and their number crunching ability means that it is easier than ever to test and unfortunately curve fit systems.
If you are buying a forex trading system from a vendor or your making your own, avoid curve fitting or lose your money quickly.