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logic_man
Registered: Oct 2010
Posts: 1489 |
11-25-11 07:44 PM
Let's say I've got a model which scores a trade set-up from 1 to 100 based on a number of objective factors. Any price action that triggers the set-up is a valid trade signal, but, historically, only trades which score above a 30 are profitable, in aggregate. Not that all trades under 30 fail, just that the profit factor is below 1. Taking only the trades above 30 yields a profit factor that is much higher and indicative of a robust strategy.
Is ignoring any trade signal which scores below a 30 on the model "curve-fitting" or is it just a case of ignoring similar, yet somehow different, market action?
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frostengine
Registered: Oct 2005
Posts: 1215 |
11-26-11 03:18 AM
The idea of "curve fitting" is not necessarily evil by definition. I rely heavily on curve fitting to identify patterns. However, there is a right way to do it and a wrong way.
When you apply the 30 threshold to out of sample data (data not tested to base your decision on using 30) how does it perform? Do the performance metrics stay reasonably in-line? If so, then your fine..
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logic_man
Registered: Oct 2010
Posts: 1489 |
11-26-11 05:40 PM
Quote from frostengine:
The idea of "curve fitting" is not necessarily evil by definition. I rely heavily on curve fitting to identify patterns. However, there is a right way to do it and a wrong way.
When you apply the 30 threshold to out of sample data (data not tested to base your decision on using 30) how does it perform? Do the performance metrics stay reasonably in-line? If so, then your fine..
Yes, trades scoring under 30 are performing the same since I noticed that it was a cutoff point between two very different sets of outcomes in real trades. If anything, they're doing a little better than they were before.
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clearinghouse
Registered: Aug 2010
Posts: 572 |
11-26-11 06:46 PM
Quote from logic_man:
Let's say I've got a model which scores a trade set-up from 1 to 100 based on a number of objective factors. Any price action that triggers the set-up is a valid trade signal, but, historically, only trades which score above a 30 are profitable, in aggregate. Not that all trades under 30 fail, just that the profit factor is below 1. Taking only the trades above 30 yields a profit factor that is much higher and indicative of a robust strategy.
Is ignoring any trade signal which scores below a 30 on the model "curve-fitting" or is it just a case of ignoring similar, yet somehow different, market action?
Variance-bias trade-off, my good man. You decide how much trade-off you want to make, but just be aware of the consequences.
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logic_man
Registered: Oct 2010
Posts: 1489 |
11-26-11 07:13 PM
Quote from clearinghouse:
Variance-bias trade-off, my good man. You decide how much trade-off you want to make, but just be aware of the consequences.
That makes sense.
I should also note that the "trigger levels" of the parameters in the model were based on an initial hypothesis of what the levels "should" be. The fact that subsequent empirical evidence has shown that the levels where they "should" be weren't, in fact, the optimal levels seems to me to just be a case of learning that the initial hypothesized levels were somewhat arbitrary, although they were in the ballpark.
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Wide Tailz
Registered: Sep 2011
Posts: 1519 |
11-27-11 02:40 AM
Quote from logic_man:
Is ignoring any trade signal which scores below a 30 on the model "curve-fitting" or is it just a case of ignoring similar, yet somehow diffrent, market action?
Every profitable system is a curve fit to some degree, IMO. Some curves last for a few weeks, some a year and others forever. Dow theory still works on the daily, last time I checked.
Old fashioned trend lines are still killing it on the weekly.
Why do these old edges still work? Not every participant in the market has the freedom of waiting to enter. Think farmers hedging every year, or oil exporters recycling petrodollarz..........
Understand who you're taking the money from.
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