A Practical Guide To Developing And Identifying Systems That Work
I
remember dreaming about profits when I received my first charting
package. However, I soon realized that there was no Holy Grail of trading.
Things that appeared profitable on the screen and in test, didn’t work so well
in real markets. The good news is, I eventually discovered that as long as you
avoided the common pitfalls of system design, market “edges†could be found.
Below we will look at
some of the more common pitfalls I have encountered in developing systems over
the years. Although the article is slanted towards the pitfalls associated with
researching a “mechanical†edge, these concepts can (and should) also be
applied to more discretionary methods.
Know Thy Data
Make sure you have
the cleanest and best data available. If you are testing futures contracts, be
aware of the anomalies when contracts are strung together. This “back
adjusting†can often cause a skew to the market. Also, make sure that the
system also works on actual contracts and does not just work on the back-adjusted
continuous contracts. For instance, I have discovered that this adjustment tends
to throw off volatility readings —