Trading System Development 101 (Part 5)

In the first four parts of this mini-series (e.g. Part 4), I talked about my walk-forward (WF) approach to trading system development. Before moving forward with a secondary approach, I want to tie up some loose ends.

Finding a viable trading strategy with the WF approach is really difficult (as discussed in the fourth paragraph here). This was a shocking realization. The internet contains numerous blog posts, trade gurus, and education programs all claiming to teach trading. Numerous books on technical analysis and webinars are available, chat rooms… yet none of the basic strategies that I tested work! I’m skeptical by nature (see second-to-last paragraph here) and now that skepticism has been legitimized.

Nobody should approach any of the above without being prepared to uncover what fiction/deception/omission is (are) being presented. The time to get excited about these things is when, despite concentrated efforts, I am unable to find any flaws.

Also from this fourth paragraph, I want to clarify what I meant about “[deceptive]” claims. I included the word in brackets because I consider it a possibility rather than a certainty. The e-books mention different strategies that have “been successful in metals,” or currencies/softs/equities/metals, etc. When testing a few of these myself—even on the indicated markets—I failed to find viable strategies.

While frustrating, this does not necessarily mean the e-books are deceptive because success has not been objectively defined. One winning trade could be considered successful. Any short period of profitability could be considered successful. A strategy could even test profitably over a long period with a large sample size of OS trades. My discovery of said strategy as non-viable could simply represent the difference between when the claim was published and when I tested it.

The footnote included in Part 3 is one potential critique I have about WF optimization (WFO). I would feel more confident about a set of parameters if they were to score well given a surrounding parameter space that also scores well. I would sacrifice some absolute performance in order to get a better surrounding parameter space. WFO simply looks for the best and uses it for the following OS period.

I can’t help but wonder whether I need to stop using the coarse grid if I am to continue using the WF approach. I explained this in the third paragraph of Part 3. I aim for 70 or fewer iterations per WFO to minimize processing time. This leaves theoretical opportunity for signal to drop through the cracks. Only by testing the same strategies with a fine grid could I ever know if I were being victimized by the false negative. Based on reports from others, I should be willing to increase number of iterations at least 10-fold to do this testing. Such comparison would be an interesting study to do.