Today we’re covering a topic which can really be a concern for traders of all levels, from beginner to pro, and that is the topic of strategy evaluation.
I’m sure we’ve all heard of data mining bias, over-optimization and curve fitting and the impacts this can have on our trading accounts.
We may be even using techniques such as Out Of Sample testing, Walk Forward Analysis, Monte Carlo analysis and a number of other measures to identify or reduce the impact of these issues, but do these approaches actually work? Are there limitations or dangers with these techniques? Are there better ways?
In this episode we talk to someone who evaluates trading systems for a living, plus his research into system evaluation techniques has won awards. The guest is Dave Walton.
Dave was the winner of the Wagner award in 2014 for a paper titled ‘Know your system – turning data mining bias to benefit through System Parameter Permutation’.
In our chat today we talk about the technique in his paper and how it can be applied to trading strategy evaluation. We also discuss some of the assumptions and limitations of the approach, and he shares with us some valuable insights he’s made since publishing the paper which have resulted in an updated approach he now considers a better alternative, so make sure you listen out for that.