Adrian Reid explains why traders fail by overfitting systems to past data with too many tweaked indicators. Instead, use a handful of simple rules like moving averages or breakouts that work across different parameter ranges, so they actually perform when you trade them live.
Now let me, let me demonstrate the right way versus the wrong way. Let's say.
I've got certain rules and it might be a little bit technical, but let's say I can do. One thing we do in technical trading is moving averages. And what that is is you take the price today and yesterday and the day before and the day before and you add them up and you take the average. And if the price today is above that average, then it's probably trending.
The price is below the average is probably trending. Yeah. Simplest example of an indicator, technical indicator. You can have lots of different indicators in your system. So let's say I develop a set.
Of rules and I keep adding lots of different indicators until I eliminate all.
The bad trades in the past. And the back test looks really great. And in order to do that I've added 20 different rules and then I varied the numbers in all of the different rules to find the one combination that worked amazingly well in the past.
Now do you think that would work in the future?
No, because I've added so much complexity and I fine tuned it so much to those exact conditions in the past to force the backtest to look good. That complexity won't be able to predict the future. It won't be able to predictably extract profit in the future. But if I have a much broader, more general set of rules, let's say.
I have two or three rules and those rules work whether I use a.
200 day average or 150 day average or a 300 day average, doesn't matter.
It's all profitable in the past. And.
If I use a, if I.
Use a 50 day breakout or a hundred day breakout or a 40 day breakout or a 75 day breakout, they're all profitable. Like those rules are stable, right? I haven't fine tuned them to make the past look good. It works kind of. No matter what parameter values I used, that is then more likely to make money in the future. And there's the difference, right?
We need elegant simplicity.
That works in a very broad sense rather than ultra.
Complex specifics that work only under precise conditions. Then we can make money in real time trading.
It.
