Beware of Curve Fitting or Lose
If you are thinking of buying a currency trading system, then you will find that well over 95% of systems sold have great track record, but lose in real time trading. The reason is curve fitting. So if you want to find one that works, learn what it is and how to spot it.
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I would say that of the currency systems sold on the net, most are curve fitted on purpose, to allow the vendor to show a profit so they can sell the system. If you don't know what it is then you will lose. Forget the track record you see, in most cases that's not what you're going to get!
Curve fitting in simple terms means optimizing the system to fit the data. A trader I know once likened this to shooting at a barn door and then afterwards, drawing a bulls-eye around every one, to make them look like a bulls-eye! In currency trading, a system vendor will simply find his system doesn't work on a segment of data, so he makes it work and bends the system (curve fits it) until it does. The clue to a curve fitted system is:
Lots of rules and parameters, different rules for different types of market and different ways of trading individual currencies. If you see a track record that shows extra ordinary profits with low drawdown it's probably curve fitted.
Many vendors don't realise that the more they bend the system to fit the data the more likely it is to collapse in real time trading. No one bit of data is going to replicate itself exactly again. If a currency trading system is soundly based, it should work across all markets and use the same rules all the time and be simple with few rules and parameters.
As long as a vendor puts this disclaimer on he is free to present any track record he likes. Here is the standard CFTC one:
"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".
This allows unscrupulous vendors to present any gains they like and they do! They know that the system won't work but they know that the naive trader will fall for a track record of gains. The vendor makes a profit and the trader has a guaranteed loss!
Lets face it anyone can make a profit in hindsight but the problem is that we need to trade without knowing the data. If you buy a currency trading system look for the evidence of curve fitting. The majority of systems use it whether it's done on purpose or in error. Stick with simple systems which are easy to understand, where the logic is fully revealed - or even better, insist on some evidence the system works, by asking for a real time track record over at least two years.
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