Can a trading strategy work in the long run without curve fitting and over optimizing?
In this video:
00:57 Having Your Own Strategy
02:53 Why Trade Price Action
06:14 The Best Trading Option
How do you know if your trading strategy is going to work in the long run without curve fitting and without over optimizing? Let me explain more details about that right now.
Hi Forex traders, this is Andrew Mitchem here, the Forex Trading Coach and today is Friday, the 23rd of October. I've received an email from someone saying, “Hey look Andrew, I'm developing my own strategy, but my problem is I really have no confidence in that strategy long term, like in the long run. How do I know that it's going to work in the longer term, in several weeks from now and months, years and many years from now? How do I know that without curve fitting my strategy and over optimizing it as time goes on?”
Having Your Own Strategy
It's something that affects probably most Forex traders when they have their own strategy. It's almost like, do you have confidence that that strategy has not only worked in the past, but will work in the future and of course, no one knows the exact answer to the future but there are certain things you can do to put probability on your side and I explain about that shortly. Because the problem that many traders face is that they come up with a strategy and then they curve fit it, so by curve fitting I mean they almost make it fit to the perfect conditions. With optimization, you almost take the perfect settings, if you're using a group of let's say indicators to make the most profit with the least draw down, etc. on back testing data.
I used to do that myself, you know, I'm guilty as anybody. When I first started trading I used all sorts of different back testing software, and some very good software as well, but the problem is that I was always curve fitting and optimizing my strategy. Of course you then go and say, yeah, this is the best strategy ever. It's going to beat everything that there is, just made me X amount of millions and millions of dollars and so you take it live and of course inevitably it doesn't work in the current conditions and it fails and you go through the whole cycle again.
You think, oh maybe if I add this indicator or tweak this a little bit here or there or change this, you know, you think that will suddenly be the magic fix and the same thing happens. You go through the cycle again, and you take it live, it might make a dollar or two to start with and again, it probably fails. As I said, I've been there myself and I know that the issues and the frustration that that causes, but there is a solution, well I certainly found a solution that works for me. That is to come back to price action trading.
Why Trade Price Action
I'm a big believer in price action trading and my strategy that I've got going behind me on the screen, if you're watching the video, sorry if you're listening to the podcast, you can't see, but my strategy has been unchanged for eight years now. The reason that it's been unchanged for eight years is because it's based on price action. Price action will always be price action regardless of the market conditions and that's why I have full confidence, not only does it work really well for the last eight years, I've got confidence it's going to work for the next eight years and more, into the future.
The reason is, is because a lot of strategies unfortunately only work if the conditions are a certain condition. Let's say a lot of strategies only work if the market's trending really, really strongly. Other strategies only work if there's a range bound market or at certain times of the day. Other strategies only work on certain currency pairs or certain timeframe charts. When you think about that, why is that? I can't see any logical reason why the strategy's any good, it will only work on the Euro/US Dollar (EUR/USD) 15 minute chart, let's say as an example and that shouldn't be the case.
Why would a strategy only work on let's say the Euro/US Dollar (EUR/USD) 15 minute timeframe chart? I can't see why that would be the case. What's so unique about that currency pair and that timeframe to say that this so called super strategy doesn't work across other timeframes and other pairs? That's another great thing when it comes back to price action and the way that I trade, is that my strategy works equally as well across all currency pairs and all timeframe charts.
Now as an example, if I turn around here and tell you what I've got open on my charts, live right now, I've got trades on the:
- Aussie/New Zealand (AUS/NZD)
- Pound/Yen (GBP/JPY)
- New Zealand/US (NZD/USD)
- Pound/Canadian (GBP/CAD)
- Pound/Yen (GBP/JPY)
- Aussie/ Franc (AUD/CHF)
- Pound/New Zealand (GBP/NZD)
- Euro/New Zealand (EUR/NZD)
I've got eight different currency pairs open on the charts behind me on various different timeframes, 1-hour charts, 4-hour, 6-hour, 12-hour, daily and weekly. Various currency pairs, various timeframe charts.
As you can see, because the strategy is price action based, it works across all timeframe charts and various currency pairs, all currency pairs. It comes back to the simple fact is if the market is range bound and going sideways, then quite often there are very few good trade set ups. Yet if the market starts moving up or down and there's pull backs or extensions within the market, then quite often you will find very good set ups based on a price action based strategy.
It really means that no matter what the current market conditions or what the future markets will be, if you have a good strategy that's soundly based on price action and price levels and that's proven to work in the past, there is no reason why that isn't going to work, no reason why it would not work successfully into the future.
I hope that that helps and just be really careful if you are someone who does optimize and curve fit, especially if you use far too many indicators, because there is that danger of trying to make it perfect for today's conditions and in the future that strategy may not work.
The Best Trading Option
In my opinion, the best option there is, is to always come back to price action and look at what the charts are telling you, because the charts tell you what's happening in the market right now. Trading from the right hand side of the chart is really, in my opinion, the only way you can make really good money through Forex. What's already happened in the past is great information to be able to use, but it doesn't make you money today as in taking a new trade. Only that right hand side of the chart onwards is really where you're going to actually place your positions into the market and make money.
Of course, that's not as easy as it sounds because that is the hard part of trading, is being able to not have the benefit of hindsight and what's happening in the future, but being able to make your decision based on what you see right now in the market. That again, is having a good solid structure and a plan in place.
If I can help you further with that, what I suggest you do is hop on to one of my free webinars that I hold. I hold webinars for new traders and webinars for more experienced traders and of course for my coaching clients, I hold live trading room sessions where I'm trading on my charts here behind on a live account in front of my clients who see me taking trades on various timeframes charts throughout the two hour session.
If it's something that you're interested in, either hop onto one of those free webinars or if you'd like to go further and take it to that next step and become a coaching client and to join the live trading room sessions, then drop me an email or just register for one of those webinars.
Hope you have a great weekend and look forward to bringing you more Forex trading tips and information this time next week. This is Andrew Mitchem, the Forex Trading Coach.