Evolutionary computation in forex
It is no mystery that one of the most important challenges in the development of trading systems is to be able to get a good estimate of future risk and profitability. The first approach to do this is to back-test the strategy across a large segment of time (usually 10 to 20 years) but this approach is plagued with problems that become more and more apparent as the degrees of freedom within trading strategies start to increase. Within this post I want to talk to you about some of our experience in the area of trading system development, why the above approach is problematic and why walk forward analysis can help us eliminate many of the above mentioned issues.
Our journey starts with a very important question. How do I know the amount of profit and – more importantly – risk that I should expect from a trading strategy in the future? The obvious answer would be to carry out simulations of the strategy over a long period of time in the past and then determine – through these results – what the expected boundaries for profit and risk might be going forward. The problem with this approach comes when you consider the inherent plasticity of strategies, natural to the degrees of freedom contained within them. How do you know if your strategy matches some ever-present aspect of the market or if it just happened to profit from randomness in the market through what is nothing but random chance?
Source: Mechanical Forex
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