Podcast:

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?