Parameter Shift

"Professional traders know how to
deal with parameter shift."

Professional traders know that markets are always changing and what would have been the 'best' parameter settings for their systems in the past, will not be the best settings in the future.

The change in 'best settings' is sometimes referred to as parameter shift.

Parameter shift is like weather variation - you know it's going to happen. It's just about as rare as weather variation too - so it's going to happen pretty well all the time.

What do professional traders do when parameter shift occurs?

In a nutshell - nothing!

When they initially choose the parameter values for a system, it is done as part of their whole evaluation procedure, which depends on other things as well.

Afterwards, they do not undertake a perpetual chase to keep up with the latest settings that would have given 'best results'. (That would be curve fitting wouldn't it?)

Traders do review their whole systems periodically and any 'sea change' would be detected. Perhaps some parameter revision would then be justified but this would be the exception rather than the rule.

The successful system traders ensure that their rules are general and do not discriminate either across time periods or different commodities. They deal with parameter shift by viewing it in that broad perspective.

Rules should be of general applicability and it is more a case of avoiding settings that do not produce acceptable results or haven't done so up to now than it is to find 'profitable' settings. Avoiding where you don't want to be or have no reason to think it is a good place to be, or a place which is no better than random is the name of the game.

 

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Copyright David Bromley 2006
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