There are a huge number of Forex trading systems and strategies sold online which have fantastic growth and very little draw down and you should not consider them because there curve fitted. Let's look at the concept of curve fitting and why you need to avoid these back tested strategies.
As online Forex trading has grown in popularity many traders, don't want to take any time learning how to trade Forex – they want big profits with no work (don't we all) and they decide to buy one of the numerous get rich quick strategies sold online and believe they can make incredible gains, doing no work and just executing trading signals automatically but they soon lose money because these systems have been curve fitted to fit historical data and have no chance of making profits in real time – let's take a look at why.
Curve Fitting What is It?
The system tester runs his software over historical data and then looks to make it profitable by changing settings on chart rules and indicator setting used for the entry of trading signals until it makes a profit. What the system tester is doing is bending the rules to fit the past price action until he comes up with huge gains and low downside volatility.
A curve fitted system though is destined to fail in real time trading because to get huge gains with low draw down requires a huge amount of tweaking of the rules but price data, will never replicate itself in the same way in the future as it has in the past and the system breaks down in real time trading and losses quickly.
Why Curve Fitted Trading Strategies Fail
The fact is in Forex trading due to the nature of the way Forex prices move, a simple system will beat a complex one with to many inputs and this has always been so. Since online trading commenced we have seen faster distribution of information, better and more powerful software programs and better spreads yet, its a fact today, that 90% of traders will still see their trading accounts wiped out so – the advances in software, may have helped traders create systems more quickly but it hasn't changed the fact that if you make a system to complicated, its trading signals will lose in the market.
Many traders are in awe of such buzz words as fuzzy logic, artificial intelligence, neural networks and high frequency trading algorithms but they shouldn't be – these clever and predictive systems lose money.
How to Spot a Curve Fitted Trading Strategy
The performance of the trading signals will be to high in relation to draw down be sceptical of any trading strategy which claims for example 100% per annum gains with drawdowns of under 10% and also be wary, if the recover from a valley to a new peak in equity takes less than a month.
In terms of curve fitted systems, rules should be consistent across all currency pairs traded. If a system has unique rules for different pairs or different markets, it will be curve fitted.
Look at the number of rules and parameters in total – the more rules it has the more its likely to have been curve fitted.
The best forex systems will contain a few rules and use these rules to trade all currency pairs and will while they may make profits long term, they will experience periods of short term draw down. The general rule of thumb is – the bigger the profits – the bigger the drawdown. For example a system which makes 100% + per annum on its currency trading signals is likely to at some point draw down from a peak by 30% and the period of losses will last from anywhere between 3 – 6 months.
Scam Trading Systems
Many currency traders curve fit systems to sell them to the huge number of traders online who are naïve and greedy and are either to lazy to get a Forx trading education or are naïve about how and why currency pairs really move.
They sell so called Forex Expert Advisors or Robots and the public believes they will make money buy them – lose and then move onto the next robot. Trading Forex markets is not a game – its a serious profession and if you want to trade like a pro, you need to learn to trade currencies correctly and know what your doing.
If you seem systems which look to good to be true – then you need to see if they have been curve fitted to fit past data and the chances are they have. Curve fitting is easy to do and anyone can bend a currency trading system to make profits, knowing the price history but going forward, you don't have that luxury.
Forex price patterns do repeat but not in the same EXACT way as before and this is why you only need a simple trading system to win and while you will have draw down in the short term, you will if you system is logically based and applied with discipline make money with it long term.