It's a fact that the overwhelming majority of forex trading systems lose money despite presenting track records of extraordinary gains and the reason is simple - their curve fitted....
So what is curve fitting?
Curve fitting is used when traders simulate a track record over past data. They bend or curve fit the rules of their system to fit the data and show a profit. This simulated back test is then presented as evidence, that the system will make money going forward but there is a problem here...
In real time trading you can't curve fit as you dont know the prices in advance!
The same data sequence never replicates itself exactly again and the system collapses in real time. Paper dollars are not real dollars and it is ridiculous to claim that because a system works backwards, (with all the data to hand) that it will work going forwards, not knowing the prices.
Some of the forex automated trading systems you see, have track records Warren Buffet would be proud of yet, you can gain access to these gains for $100. You are then on the road to financial freedom and can earn an income for life, with no effort on your part. Alas this is not real life, its fantasy land.
Curve fitting is easy to spot just look for this.
1. Huge profits or little or no drawdown on the track record
2. Look for the CFTC disclaimer
"CFTC RULE 4.41 - Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading"
It's quite long but ends up telling you how much weight you should place on the track record in terms of how much money it will make you.
"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".
This is not to say that a back test cant work it can - but most vendors don't do it correctly and this is what you will normally see...
1. Lots of rules and parameters
2. Different rules for different trading conditions and currency pairs
3. Lots of subjective variables that are down to your discretion.
4. Subjective exit points
Generally, an automated forex trading system that's successful will trade all markets and all conditions the same way, be very objective and only consist of a few rules or parameters.
There are some good forex trading systems out there, to find them though you need to get rid of all the curve fitted ones. If you want to use a simulation look for non cruve fitted one or even better, get one that has shown some evidence of real time gains.
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2 comments:
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