First, one of my favorite quotes of all time by John Feynman:
“The first principle is that you must not fool yourself, and you are the easiest person to fool.”
This should be in the back of your mind whenever you’re optimizing trading strategies.
A skeptical mindset in this phase can save a lot of time and drawdown pain later.
When you first start optimizing a strategy, it’s easy for traders to fall into the trap of “following the data” too closely.
Not thinking deeply about which rules to apply to a strategy.
Adding too many rules, because, hey, that’s what the data is telling me, and who am I to argue with the data?
What many traders overlook when adding rules to their strategy is ensuring the rule tells a coherent story.
The next time you add a rule to your strategy, imagine having to present your case to a jury of skeptical traders that your rule is predictive and worth adding.
Given the strategy’s entry signal, WHY will this rule improve the strategy?
“Because the data says so” is not good enough – but that’s what most traders use to justify it.
Does the rule tell a coherent story?
It better!
-Dave
P.S. I’ll be doing a series of emails on Amibroker soon, a backtesting and charting software I’ve used for years. Several traders have beta tested my Amibroker course, and the feedback has been excellent. Look for an announcement soon on the official course launch and early bird pricing.
