Currency Trading Systems - the Major Reason Most Lose
If you buy a currency trading system from a vendor, chances are it won't make money in line with its track record. Furthermore, if you test your own in most cases it won't produce the same in real time trading.
Why? The answer lies in curve fitting - if you don't know what curve fitting is, read this article and it could save you a lot of money.
What is curve fitting?
Curve fitting is when the system rules are bent (curve fitted) to the data, to make it produce a profit. This is very similar to shooting blindly at a barn door with a shotgun and then drawing a bulls-eye around everyone afterwards!
Curve fitting and buying a system
Most of the currency trading systems sold by vendors have great track records in back testing and in most instances never produce the gains in real time.
A hypothetical track record is exactly that:
It's designed knowing the closing forex prices and of course it's easy to make a profit when you know the closing price in advance.
Many vendors simply make sure the trading system makes money so they can sell it.
They know it wont work in real time, but that doesn't matter, their after system sales.
A clue to curve fitted system is:
1. Black box - Where the logic and rules are not revealed.
2. Optimization - This is where the data has to be bent. Clues to an optimized curve fitted system are - unique rules or parameters, for different market conditions or currencies.
The Gamblers Illusion
Of course, on a few years currency trading history there is an apparent order, but just like the roulette gambler who sees number sequences repeating themselves, they will never exactly repeat in the same order again.
Bending the rules and curve fitting to make a currency trading system more profitable is a futile exercise.
If a system is robust and based upon sound logic, it should contain only a few rules and parameters and they should be applied to all currencies and all market conditions.
Of course, not all vendors selling currency trading systems deliberately curve fit, like individual traders back testing their system they do it without understanding exactly what they are doing.
Many individual traders I have seen, back test their systems and make money, but they want to improve profitability, so they simply bend the system to fit the data with lots of parameters and indicators.
When they trade it real time they lose.
They would have been better off with their simpler non curve fitted system!
No snap shot of trading history will produce the same patterns again - it's an illusion as we have just seen.
When back testing or looking at a system just keep the following points in mind:
1. It should be based around trading the odds.
2. It should be simple with only a few rules or parameters.
3. It should trade all currencies the same way.
4. It should trade all market conditions the same way.
5. If a track record has an absence of drawdown chances are its curve fitted, so if a hypothetical track record looks to good it probably is.
Don't fall into the trap of curve fitting!
Curve fitting is done by the majority of trading systems sold and most traders when constructing their own fall victim to it.
Curve fitting deliberate or not, is the major reason hypothetical track records that appear to give fantastic growth rates in hindsight fail miserably in real time trading.
Related Tags: currency trading, forex trading, forex, currency, currency trading systems, forex trading systems
GRAB 3 X FREE TRADER & FREE TRADER PROFITS NEWSLETTER
On all aspects of becoming a profitable trader including features, downloads and some critical FREE Trader PDF's and more FREE Forex Education visit our website at http://www.net-planet.org/index.html
Recent articles in this category:
- Sbi Best Sip Plans 2010
SBI Mutual funds have introduced many mutual schemes. Each scheme has different limitations. SBI SIP - Icici Sip Plans 2010 - Best Sip Plans
ICICI Prudential offers many schemes. These fund schemes have SIP. What is SIP? SIP's expansion is S - Determining Where To Invest Money
There are several kinds of investments, also you will find numerous factors to find out where to inv - Retirement Plans A Necessity Of Life
A person works whole life to give a decent upbringing to his children and families. But while improv - Stock Market Timing Signals
Follow the PlanThis would seem a statement of common sense, but the fact of stock market timing sign - A Selection Of Financial And Investment Strategy Guidelines For Turning A Profit
Yet, we don't often have the money to leave work right at this moment. We need a constant salary to - Find Out The Profitable Way To Invest In Small Cap Stocks
Everyone wants to find a penny stocks list or other investment strategies that can turn your literal - Portfolio #4 - Watergate
IntroductionThe problem is not that the world is running out of water. No, the problem is that drink - Dulton Group: Information Content Of Dividends
Dulton Group helps you to analyze the information content of dividends, an important factor affectin - Coping With Fear In A Markets
The real fact is that all traders, investors as well as stock market investors, who feel afraid, occ
Most viewed articles in this category:
- Investor Stress: A New Approach
George Muzea is both an investor and a stock market advisor. In any given month, he will be paid $10 - Real Estate Investment Financing
1. Location: Your real estate investment's location is arguably the most important component of your - Canadian Oil Sands - Who Are the Major Players
The Canadian oil sands represent one of the most lucrative investment opportunities to oil and gas i - Why Bulk Preconstruction?
Bulk preconstruction is the latest trend in secure, high profit real estate investing. By buying wit - Investing - It Is Not As Scary As You Think
Many people want to have more money - OK everyone does. However, most people don't know how to go a - How Do I Know Which Programs Are Scams?
Although it is virtually impossible to tell if a HYIP is a scam until the moment when they stop payi - Currency Trading Success - 6 Tips to Increase your Profits
If you want to increase your profit potential and achieve currency trading success then the simple t - The Business Cycle
Investors who want to beat the market should be followers of the business cycle. The business cycle - Pros and Cons of Real Estate
Like any other profession, there are good and bad things about what are available. Each of the thin - The Fixer Upper
Real estate investing has become almost a national pastime. Millions are made every year on the buyi