Modus Trading
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Modus Trading

Curve Fitting

"The more rules the better -
your trading will be more accurate"

Through no fault of their own, newcomers to trading have entirely the wrong idea about most aspects of trading commodities.

They think that running tests using historical prices is to find out what results they are likely to get in future. This leads to the idea that the past will repeat itself and that you can therefore discover what rules your system would need in order to get the best results.

Adding more rules is done to capture more and more of the ‘good’ and cut out more and more of the ‘bad’. So the more rules you have, the better the results become and the more finely tuned your system becomes.

Yes, this argument can be made to sound very convincing, especially if you are keen to believe it. Unfortunately, it is quite wrong.

For a start, past results will never repeat themselves at any level of detail, so the idea of a system being adjusted to take advantage of this faulty belief is quite outrageous.

Successful systems traders (the ones who take most of the profits from the commodity markets) design their systems to take account of the way markets behave. They make sure their systems are as non-discriminating as possible and trade all commodities the same way. The fewer rules the better.

So how has this mistaken ‘many rules’ idea come about?

Mainly through incorrect information fed to would-be traders by people selling products that are supposed to make you rich without much thought or effort. The people who sell these products are not traders and know precious little about the subject.

Each additional rule is attempting to ‘trap’ or ‘exclude’ some extra circumstance and this is just another form of what is known as curve fitting.

Keep the number of rules in your system down to the bare minimum and never base them on particular past situations.

Find out as much as you can about commodity trading before you start and when you fully appreciate why it is best to have as few rules as possible, you will know that you are following the right path.


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Copyright David Bromley 2006
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