Curve Fitting and Over-optimization
A major stumbling block for many market timers is the phenomenon of curve fitting. This means that a given set of trading rules has been over-optimized to fit the particular dataset for which it has been back-tested. Unfortunately, if the trading rules are over-optimized they often fail to work on future data. Market timers attempt to avoid these difficulties in a number of ways. One is by looking for clusters of parameter values which work particularly well. Another is using out-of-sample data, which ostensibly allows the market timer to see how the system will work on unforeseen data. However, critics charge that once the strategy has been revised to reflect such data it is no longer "out-of-sample".
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Famous quotes containing the words curve and/or fitting:
“In philosophical inquiry, the human spirit, imitating the movement of the stars, must follow a curve which brings it back to its point of departure. To conclude is to close a circle.”
—Charles Baudelaire (1821–1867)
“The most fitting monuments this nation can build are schoolhouses and homes for those who do the work of the world. It is no answer to say that they are accustomed to rags and hunger. In this world of plenty every human being has a right to food, clothes, decent shelter, and the rudiments of education.”
—Elizabeth Cady Stanton (1815–1902)