The most likely error is over fitting your trading idea until it
works in exactly the environment you have tested it on, but nowhere else.
 |
It might be over fitted so that it works on that special
stock, but not on others |
|
It might be over fitted so it works on the time period used,
but will not work on future data |
For example, many programs will allow you to test the profit
returned if you run your trading idea on one single stock, or against one single
index. They also allow you to optimize your system against that stock or index.
Doing that on the MACD signal described in the
section on trading systems that does not return
profit turns the system into a profit maker against for example SXGE. Using those
parameters and running it against all stocks still does not return a profit,
actually the loss after optimization
has now been turned into a bigger loss. You
are thus facing a number of alternatives:
|
Decide that the system thus optimized is not over fitted, and
will work in the future against that stock or index. This is unfortunately
hard to tell, you have a system that on average makes a loss. Is this
stock/index so much different than the rest that it will continue working
for this item? Maybe. But how shall you tell? How will you keep your
confidence up after 3 losses in a row? How will you avoid starting second
guessing your system? |
|
Decide that Technical Analysis is not for you |
|
Decide that you will go through anyway, maybe it works
although you seem to have the numbers against you |
|
Decide to find a system that when working good on the
stock/index you are interested in still works with profit on the other
tradable stocks you could select to trade with. In this case, it is a lot
easier to feel that you have got the odds with you, and that you can keep
your confidence even after a number of losses. To do this, you need to test
your trading ideas. |
|
